Can the Book-to-Market Ratio Signal Banks’ Earnings and Default Risk? Evidence Around the Great Recession
44 Pages Posted: 10 May 2018
Date Written: April 24, 2018
We examine the association between the book-to-market (B/M) ratio and the subsequent earnings and default risk of US banks in the period around the Great Recession. We find that banks with higher B/M ratios have consistently lower future earnings and greater earnings volatility. In addition, these banks have higher loan delinquency, more charge-offs, and lower Z-scores. We show that the B/M ratio signals information about a bank’s earnings and default risk about four to nine quarters before actual poor performance. Thus, the results show that the B/M ratio can provide advance signals for market monitoring of banks.
Keywords: Market discipline, Bank performance, Risk assessment , Book-to-market Ratio
JEL Classification: G21, G28, G14
Suggested Citation: Suggested Citation