The Pricing of Bank Stocks in Europe

26 Pages Posted: 29 Apr 2005

See all articles by Dimosthenis L. Hevas

Dimosthenis L. Hevas

Athens University of Economics and Business - Department of Accounting and Finance

Georgia Siougle

Athens University of Economics and Business - Department of Accounting and Finance

Christos Staikouras

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: April 26, 2005

Abstract

In this study we examine the validity of the earnings - book value capitalization (EBVC) model in the European banking sector. We perform cross section tests using a sample of credit institutions from 21 European Union countries. Moreover, we split our sample into code law and common law countries to check for the influence of the accounting regulatory regime upon the earnings response coefficients. Our empirical findings suggest that disaggregating total reported clean surplus income into income from banking activities and other income increases the explanatory power of the EBVC model. Income from banking activities is priced higher than income from non-banking activities, irrespective of whether the financial sector is classified as a code law or a common law system, probably because the market considers the former as a more stable source of income. Earnings reported under a common law accounting system are priced differently from those reported under a code law accounting system. We also provide evidence that comprehensive income and dirty surplus income are two value relevant variables for banks reporting under a code law system, although dirty surplus income is priced lower than clean surplus income.

Keywords: Banking sector, earnings, market value, income sources

JEL Classification: G20, M41, G12

Suggested Citation

Hevas, Dimosthenis (Dimosthenes) L. and Siougle, Georgia and Staikouras, Christos, The Pricing of Bank Stocks in Europe (April 26, 2005). Available at SSRN: https://ssrn.com/abstract=710961 or http://dx.doi.org/10.2139/ssrn.710961

Dimosthenis (Dimosthenes) L. Hevas (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Georgia Siougle

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Christos Staikouras

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
Athens, 104 34
Greece
+30 210 8203 459 (Phone)

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