Are Larger Banks Valued More Highly?

49 Pages Posted: 22 Mar 2017

See all articles by Bernadette Minton

Bernadette Minton

Ohio State University (OSU) - Fisher College of Business

René Stulz

Ohio State University (OSU) - Fisher College of Business

Alvaro G. Taboada

Mississippi State University

Date Written: March 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.

Suggested Citation

Minton, Bernadette and Stulz, René and Taboada, Alvaro G., Are Larger Banks Valued More Highly? (March 2017). NBER Working Paper No. w23212. Available at SSRN: https://ssrn.com/abstract=2938756

Bernadette Minton (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

René Stulz

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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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