Are Larger Banks Valued More Highly?

Charles A. Dice Center Working Paper No. 2017-08

Fisher College of Business Working Paper No. 2017-03-008

49 Pages Posted: 22 Feb 2017  

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Alvaro G. Taboada

Mississippi State University

Date Written: February 21, 2017

Abstract

We investigate whether the value of large banks, defined as banks with assets in excess of the Dodd-Frank threshold for enhanced supervision, increases with the size of their assets using Tobin’s q and market-to-book as our valuation measures. Many argue that large banks receive subsidies from the regulatory safety net, so they should be worth more and their valuation should increase with size. Instead, using a variety of approaches, we find (1) no evidence that large banks are valued more highly, (2) strong cross-sectional evidence that the valuation of large banks falls with size, and (3) strong evidence of a within-bank negative relation between valuation and size for large banks from 1987 to 2006 but not when the post-Dodd-Frank period is included in the sample. The negative relation between bank value and bank size for large banks cannot be systematically explained by differences in ROA or ROE, equity volatility, tail risk, distress risk, and equity discount rates. However, we find that banks with more trading assets are worth less. A 1% increase in trading assets is associated with a Tobin’s q lower by 0.2% in regressions with year and bank fixed effects. This relation between bank value and trading assets helps explain the cross-sectional negative relation between large bank valuation and size. Our results hold when we use instrumental variables for bank size.

Keywords: Size and Bank Value, Bank Performance, Too-Big-To-Fail (TBTF), TBTF Subsidy, Trading Assets

JEL Classification: G2, G21, G28, G3

Suggested Citation

Minton, Bernadette A. and Stulz, René M. and Taboada, Alvaro G., Are Larger Banks Valued More Highly? (February 21, 2017). Charles A. Dice Center Working Paper No. 2017-08; Fisher College of Business Working Paper No. 2017-03-008. Available at SSRN: https://ssrn.com/abstract=2921286

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-3125 (Phone)
614-292-2359 (Fax)

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Alvaro G. Taboada

Mississippi State University ( email )

Mississippi State, MS 39762
United States
662-325-6716 (Phone)
662-325-1977 (Fax)

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