As noted in this post, the book value of a company is its assets minus its liabilities.
I am reading this paper: "The price of sin: the effect of social norms on market" by Hong and Kacperczyk. One of the paper's hypothesis is that institutional investors are less likely to hold sin stocks. To demonstrate this, the following initial (Fama-Macbeth) regression was run as a benchmark:
$$IO \sim Logsize + Beta + LOGMB + PRINV + STD+ RET $$
IO is institutional ownership Logsize is the market cap Beta is the beta of the sector the stock belongs LOGMB is the log of the market to book ratio. PRINV is the inverse of price STD is standard deviation of monthly return RET is log of arithmetic of previous year's monthly return.
My question here is that, because the Market book ratio can be negative, how can we take log of this?
It is not specified in the paper how this is treated. I have the strong suspicion that it is likely any company with negative book value for whatever reason is ignored. Surely this would introduce some sort of bias. Does anyone know what is the standard practice?