Activity-Based Valuation of Bank Holding Companies

64 Pages Posted: 23 Feb 2007 Last revised: 19 Apr 2021

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Doron Nissim

Columbia University - Columbia Business School

Date Written: February 2007

Abstract

Standard valuation methods do not lend themselves to bank holding companies. Banks create value through the types of assets and liabilities they create (e.g., lending and deposit taking relationships). Bank income streams reflect heterogeneous sources of income which differ in their margins of profitability and persistence. Our approach to valuation permits potential differences in the composition of assets, liabilities, income and expenses, and in the profitability and persistence of different sources of income, to reflect themselves in estimated relationships that relate the composition of the balance sheet and income statement to bank value. Our approach explains substantial cross-sectional variation in observed market-to-book values, and residuals from cross-sectional regressions of market-to-book values are useful for predicting future stock returns. Predictable future variation in returns does not reflect priced risk factors, but is related to trading costs.

Suggested Citation

Calomiris, Charles W. and Nissim, Doron, Activity-Based Valuation of Bank Holding Companies (February 2007). NBER Working Paper No. w12918, Available at SSRN: https://ssrn.com/abstract=964881

Charles W. Calomiris (Contact Author)

Columbia University - Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

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Doron Nissim

Columbia University - Columbia Business School ( email )

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New York, NY 10027
United States
212-854-4249 (Phone)

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