Are Larger Banks Valued More Highly?

Bernadette A. Minton, René Stulz and Alvaro G. Taboada

No 23212, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate whether the value of large banks, defined as banks with assets in excess of the Dodd-Frank threshold for enhanced supervision, increases with the size of their assets using Tobin’s q and market-to-book as our valuation measures. Many argue that large banks receive subsidies from the regulatory safety net, so they should be worth more and their valuation should increase with size. Instead, using a variety of approaches, we find (1) no evidence that large banks are valued more highly, (2) strong cross-sectional evidence that the valuation of large banks falls with size, and (3) strong evidence of a within-bank negative relation between valuation and size for large banks from 1987 to 2006 but not when the post-Dodd-Frank period is included in the sample. The negative relation between bank value and bank size for large banks cannot be systematically explained by differences in ROA or ROE, equity volatility, tail risk, distress risk, and equity discount rates. However, we find that banks with more trading assets are worth less. A 1% increase in trading assets is associated with a Tobin’s q lower by 0.2% in regressions with year and bank fixed effects. This relation between bank value and trading assets helps explain the cross-sectional negative relation between large bank valuation and size. Our results hold when we use instrumental variables for bank size.

JEL-codes: G02 G21 G28 G3 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-ban and nep-rmg
Note: CF
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Citations: View citations in EconPapers (16)

Published as Bernadette A Minton & René M Stulz & Alvaro G Taboada, 2019. "Are the Largest Banks Valued More Highly?," Review of Financial Studies, Society for Financial Studies, vol. 32(12), pages 4604-4652.

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Related works:
Journal Article: Are the Largest Banks Valued More Highly? (2019)
Working Paper: Are the Largest Banks Valued More Highly? (2018)
Working Paper: Are Larger Banks Valued More Highly? (2017)
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