Size Anomalies in U.S. Bank Stock Returns
Mendoza College of Business, University of Notre Dame
Hanno N. Lustig
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
August 15, 2012
Journal of Finance, Forthcoming
The largest commercial bank stocks, ranked by the total size of the balance sheet, have significantly lower risk-adjusted returns than small- and medium-sized bank stocks, even though large banks are significantly more levered. We uncover a size factor in the component of bank returns that is orthogonal to the standard risk factors, including small-minus-big, which has the right covariance with bank returns to explain the average risk-adjusted returns. This factor measures size-dependent exposure to bank-specific tail risk. These findings are consistent with the existence of government guarantees that protect shareholders of large banks, but not small banks, in disaster states.
Number of Pages in PDF File: 51
Keywords: Banking Crisis, Banking, Government Bailout
Date posted: August 5, 2010 ; Last revised: November 13, 2014
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