Bank Capital and Bank Stock Performance

105 Pages Posted: 26 Jul 2017 Last revised: 14 Nov 2018

See all articles by Christa H. S. Bouwman

Christa H. S. Bouwman

Texas A&M University; Wharton Financial Institutions Center

Hwagyun Kim

Texas A&M University - Mays Business School

Sang-Ook (Simon) Shin

Texas A&M University (TAMU), Mays Business School, Department of Finance, Students

Date Written: August 17, 2018

Abstract

Little is known about how bank capital affects bank stock performance. We show that capital does not affect returns unconditionally, but high-capital banks have higher risk-adjusted stock returns (alphas) than low-capital banks in bad times in and out of sample. Trading strategies earn 3.60%–4.44% annually. The results are robust to: using different bad times and capital definitions, alternative asset pricing models, and ex-ante expected returns; controlling for performance-type delistings, short-sale constraints, and trading costs; and dropping the largest or smallest banks. Our results seem to be driven by a “Surprised Investor Channel” rather than by an “Informed Investor Channel.”

Keywords: Bank Capital, Stock Performance, Trading Strategies, Uncertainty

JEL Classification: G12, G20, G28

Suggested Citation

Bouwman, Christa H. S. and Kim, Hwagyun and Shin, Sang-Ook (Simon), Bank Capital and Bank Stock Performance (August 17, 2018). Available at SSRN: https://ssrn.com/abstract=3007364 or http://dx.doi.org/10.2139/ssrn.3007364

Christa H. S. Bouwman (Contact Author)

Texas A&M University ( email )

360H Wehner
College Station, TX 77843-4218
United States
979-845-3514 (Phone)
979-845-3514 (Fax)

HOME PAGE: http://people.tamu.edu/~cbouwman/

Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
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Hwagyun Kim

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4218
United States

Sang-Ook (Simon) Shin

Texas A&M University (TAMU), Mays Business School, Department of Finance, Students ( email )

430 Wehner
College Station, TX 77843-4218
United States

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