Impact of Select Variables on Tangible Book Value Multiple of U.S. Regional Banks

Stanley Chidozie Umeorah, Adesola Oluwatosin Adelaja, Oluwatoyin Funmilayo Ayodele, Bibitayo Ebunlomo Abikoye and Nneoma Adeline Azubuike
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Stanley Chidozie Umeorah: University of Michigan, MI, USA.
Adesola Oluwatosin Adelaja: University of Virginia, VA, USA.
Oluwatoyin Funmilayo Ayodele: University of Virginia, VA, USA.
Bibitayo Ebunlomo Abikoye: Central Bank of Nigeria, Banking Supervision Department, Abuja, Nigeria.
Nneoma Adeline Azubuike: University of Southern California (Marshall) Business School, USA.

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Abstract: Aims: This study explores the relationship between regional banks' Price-to-Tangible Book Value (P/TBV) multiple and metrics such as profitability, liquidity, capital adequacy, asset quality, leverage, and operational efficiency. Study Design: A longitudinal panel data analysis of 101 regional U.S. banks, covering the financial years from 2003 to 2023. It employs fixed effects, random effects, and pooled OLS regression models to determine the drivers of P/TBV multiple. The analysis controls for time-specific factors such as pre – and post – financial crisis periods, enabling a more comprehensive evaluation of valuation trends over different economic cycles. Results: All three models were statistically significant in identifying the determinants of P/TBV. However, the fixed effects model was deemed the most appropriate, as confirmed by the Hausman test (p < 0.001), which demonstrated its consistency over the random effects model. Additionally, the F-test (p < 0.001) indicated the relevance of the fixed effects model over the pooled OLS model by highlighting the significance of individual effects. The fixed effects model and the fixed effects model with robust standard errors revealed that return on equity and bank efficiency positively influenced P/TBV, while asset size, non-performing loans, leverage, and dividend yield had significant negative effect. The model also showed higher valuations for regional banks in the pre-2008 financial crisis period compared to the post-crisis era. Additionally, upon accounting for the impact of heteroscedasticity, the statistical significance of loan-to-deposit ratio variable noted in the fixed effects model turns out to be insignificant. Conclusion: Financial stability, profitability, capital, and asset quality are crucial in determining regional bank valuations. The insights from this study will help bank managers identify key focus areas to optimize valuation and pricing strategies, ensuring that banks can align internal financial health with broader market dynamics for sustainable growth. Additionally, the findings will benefit investors by providing a deeper understanding of the financial factors driving bank valuations, enabling more informed investment decisions. While this research does not directly address the impact of macroeconomic variables on regional banks' valuations, it highlights an area that merits further investigation in future research.

Date: 2024-11-16
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Published in Journal of Economics, Management and Trade, 2024, 30 (11), pp.33-49. ⟨10.9734/jemt/2024/v30i111251⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05100709

DOI: 10.9734/jemt/2024/v30i111251

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