The Nonfinancial Value of Financial Firms

78 Pages Posted: 11 Dec 2020 Last revised: 16 Feb 2021

See all articles by Yu Shi

Yu Shi

UCLA Anderson School of Management

Date Written: November 22, 2020

Abstract

I propose that the nonfinancial component of financial firms' assets, in particular the growth opportunities associated with business operations, drives most of the variation in their equity valuation. I document this fact for a large class of intermediaries: life insurance companies. In particular, I decompose insurers' market equity returns into net financial asset returns and net business asset returns and show that these two components have very different risk exposures and are negatively correlated outside of the 2008-2009 financial crisis. The variation in life insurers' net business asset returns drives 81% of the aggregate time-series variation and 100% of the cross-sectional variation in their market equity returns. For this reason, the current intense regulation on life insurers' net financial assets may be insufficient as a great deal of risk is derived from their net business assets, which are comparatively under-regulated.

Suggested Citation

Shi, Yu, The Nonfinancial Value of Financial Firms (November 22, 2020). Available at SSRN: https://ssrn.com/abstract=3733889 or http://dx.doi.org/10.2139/ssrn.3733889

Yu Shi (Contact Author)

UCLA Anderson School of Management ( email )

Los Angeles, CA
United States

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