Equity is Cheap for Large Financial Institutions: The International Evidence

Priyank Gandhi, Hanno Lustig and Alberto Plazzi

No 22355, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In most countries, equity is a cheap source of funding for a country’s largest financial institutions. On average, the stocks of the top 10% financial companies in a country account for over a quarter of total market capitalization, but these stocks earn returns that are significantly lower than stocks of non-financial firms of the same size and with the same risk exposures. In a bailout-augmented asset pricing model with rare disasters, country characteristics that inform the likelihood of a bailout should predict stock returns. We find greater financial pricing anomalies for the largest banks in developed countries with a highly concentrated and large banking sector and fiscally strong governments, but smaller anomalies in countries with strong corporate governance, government integrity, and property rights as well as high bankruptcy costs. The pricing discrepancy widens in anticipation of large stock market and GDP declines, as the bailout-augmented asset pricing model would predict.

JEL-codes: G12 G18 G2 G21 (search for similar items in EconPapers)
Date: 2016-06
New Economics Papers: this item is included in nep-ban and nep-net
Note: AP CF
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Citations: View citations in EconPapers (9)

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Working Paper: Equity is Cheap for Large Financial Institutions: The International Evidence (2016)
Working Paper: Equity Is Cheap for Large Financial Institutions: The International Evidence (2016)
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