The leverage anomaly in U.S. bank stock returns

Frank Venmans

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This article examines the relationship between capital ratios and returns on US bank stocks between 1973 and 2019. Banks with low capital ratios do not have higher, but rather lower returns than banks with intermediate levels of capital. This is not explained by standard risk factors. As a result, risk-adjusted returns (alphas) of lowcapital banks are negative. Moreover, the stock returns exhibit a delayed reaction to changes in capital ratios. Low-capital banks that further increase their debt have high abnormal returns on the day of announcement, but tend to have low risk-adjusted returns in the 9 months that follow. The paper uncovers several explanations for this leverage anomaly: under-priced default risk, under-priced systematic risk and sensitivity to idiosyncratic volatility.

Keywords: asset pricing anonaly; bank regulation; capital requirements; leverage (search for similar items in EconPapers)
JEL-codes: G12 G14 G21 G32 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2021-11-01
New Economics Papers: this item is included in nep-cba, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of International Financial Markets, Institutions and Money, 1, November, 2021, 75. ISSN: 1042-4431

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http://eprints.lse.ac.uk/111907/ Open access version. (application/pdf)

Related works:
Journal Article: The leverage anomaly in U.S. bank stock returns (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:111907

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