Did the financial crisis affect the market valuation of large systemic U.S. banks?

Abstract

We examine the impact of the financial crisis on the stock market valuation of large and systemic U.S. bank holding companies (BHCs). Using the Bertsatos and Sakellaris (2016) model of fundamental valuation of bank equity, we provide evidence that the financial crisis has not altered investors' attitudes towards bank characteristics. In particular, before, during, and after the crisis, investors in large and systemic U.S. BHCs seemed to penalize leverage, albeit temporarily. Both before and after the crisis, they reward size in the short run. This pattern is appearing only briefly during the crisis. We also show that bank opacity plays no role in market valuation either in the short run or in the long run. Last but not least, we find evidence that stress testing has been informative to the market and that those BHCs that failed at the post-crisis stress tests were not subsequently valued differently by the market.

A Critical Assessment on Bank Valuation in Existing Literature in the Last Decade

“…Using the pooled mean group method, a method found by Pesaran et al, (1999as cited in Bertsatos et al, 2017) that allows P/B ratio to deviate from the equilibrium temporarily. The study found evidence that the financial crisis did not alter investors' attitude towards the characteristics of banks (Bertsatos et al, 2017). For example, before and after the crisis, investors in large, systemic bank holding companies penalized leverage although it is temporary (Bertsatos et al, 2017).…”

“…The study of Bertsatos, Sakellaris & Tsionas (2017) examined the impact of the financial crisis on the valuation of large, systemic bank holding companies in the US, using the 3DM of Bertsatos & Skellaris (2016as cited in Bertsatos et al, 2017. 3DM stands for Dynamic Dividend Discount Model.…”

“…The study found evidence that the financial crisis did not alter investors' attitude towards the characteristics of banks (Bertsatos et al, 2017). For example, before and after the crisis, investors in large, systemic bank holding companies penalized leverage although it is temporary (Bertsatos et al, 2017). He & Niu (2017) examined the impact of economic policy uncertainty [EPU] on valuation of banks.…”

Do bank bailouts have an impact on the underwriting business?

“…Some related studies have examined the effects of bailout programs on bank risktaking (Black & Hazelwood, 2013;Duchin & Sosyura, 2014;Hakenes & Schnabel, 2010;Li, 2013), financial stability (Berger, Roman, & Sedunov, 2019), liquidity creation (Berger, Bouwman, Kick, & Schaeck, 2016) and banks' stocks valuation (Bertsatos, Sakellaris, & Tsionas, 2017;King, 2019;Liu, Kolari, Kyle Tippens, & Fraser, 2013;Veronesi & Zingales, 2010).…”

Lock‐In Effects in Relationship Lending: Evidence from DIP Loans

“…A number of studies argue that the existing lender's information advantage is a leading cause of higher loan costs and an entry barrier to new lenders, see, for example, Rajan (), Hauswald and Marquez (), Marquez (), Dell'Ariccia and Marquez (), Bertsatos, Sakellaris, and Tsionas (), and Vesala ().…”