Can the Book-to-Market Ratio Signal Banks’ Earnings and Default Risk? Evidence Around the Great Recession

44 Pages Posted: 10 May 2018

See all articles by Bhanu Balasubramanian

Bhanu Balasubramanian

University of Akron - College of Business Administration - Department of Finance

Ajay A. Palvia

FDIC, Division of Insurance and Research

Dilip K. Patro

OCC

Date Written: April 24, 2018

Abstract

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

Balasubramanian, Bhanu and Palvia, Ajay A. and Patro, Dilip K., Can the Book-to-Market Ratio Signal Banks’ Earnings and Default Risk? Evidence Around the Great Recession (April 24, 2018). Available at SSRN: https://ssrn.com/abstract=3168033 or http://dx.doi.org/10.2139/ssrn.3168033

Bhanu Balasubramanian

University of Akron - College of Business Administration - Department of Finance ( email )

259 S. Broadway
Akron, OH 44325
United States

Ajay A. Palvia (Contact Author)

FDIC, Division of Insurance and Research ( email )

550 17th Street NW
Washington, DC 20429
United States

Dilip K. Patro

OCC ( email )

400 7th Street SW
Washington, DC 20219
United States
202-649-5548 (Phone)

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