Can the Book-to-Market Ratio Signal Banks’ Earnings and Default Risk? Evidence Around the Great Recession

Bhanu Balasubramnian (), Ajay Palvia and Dilip K. Patro ()
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Bhanu Balasubramnian: The University of Akron
Dilip K. Patro: Federal Deposit Insurance Corporation

Journal of Financial Services Research, 2019, vol. 56, issue 2, No 1, 119-143

Abstract: Abstract We examine the association between the book-to-market (B/M) ratio and the subsequent earnings and default risk of US banks in the period around the Great Recession. We find that banks with higher B/M ratios have consistently lower future earnings and greater earnings volatility. In addition, these banks have higher loan delinquency, more charge-offs, and lower Z-scores. We show that the B/M ratio signals information about a bank’s earnings and default risk about four to nine quarters before actual poor performance. Thus, the results show that the B/M ratio can provide advance signals for market monitoring of banks.

Keywords: Market discipline; Bank performance; Risk assessment; Book-to-market ratio (search for similar items in EconPapers)
JEL-codes: G14 G21 G28 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10693-018-0299-4

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