How does bank opacity affect credit growth and return predictability?

Arpit Kumar Parija and Malvika Chhatwani

Journal of Empirical Finance, 2024, vol. 79, issue C

Abstract: Prior research finds that bank credit growth predicts lower bank equity returns in subsequent one to three years. Stocks of banks with high credit growth are initially overvalued because of overoptimism or elevated sentiment of bank shareholders. Eventually, these stocks underperform, generating lower returns. We argue that shareholder sentiment should exhibit its strongest effects on the performance of bank stocks when banks are opaque, or there is uncertainty about the quality of bank loans. Accordingly, we show that an increase in bank’s financial reporting opacity amplifies the predictive ability of credit growth for equity returns by 3 to 4 times relative to when opacity is at its mean.

Keywords: Bank opacity; Credit growth; Return predictability (search for similar items in EconPapers)
JEL-codes: G12 G21 M40 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:79:y:2024:i:c:s0927539824000872

DOI: 10.1016/j.jempfin.2024.101553

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