The Relationship Between Market and Accounting Betas for Commercial Banks

Abstract

This study examines the correlation between market equity betas and accounting asset and equity betas in the commercial banking sector. A sample of banks was taken from the COMPUSTAT tapes and annual equity and asset accounting betas (calculated with various indices) were estimated over varying time periods. Cross-sectional correlations were then determined for individual banks and five-bank portfolios. The results indicate that the correlations are comparable to those found in other non-banking studies ofaccounting and market betas. A noticeable difference in our study was the sensitivity ofthe correlations to the length of the estimation interval for the betas. The longest estimation intervals (16-18 years) produce few significant correlations in our sample. These correlations were Significantly lower than those obtained using fifteen or fewer years ofdata. Construction ofportfolios generally increases all the correlations but the longer time period correlations are still significantly lower. The correlations are largely invariant, however, to the choice of index used in the estimation of the betas. . The authors wish to thank Arun J. Prakash for his helpful comments as well as two anonymous referees for their valuable suggestions.

Consumption, earnings risk, and payout ratios

“…2 Beaver and Manegold (1975), and Ismail and Kim (1989) confirm prior findings about the significant relationship between market betas and earnings betas, using a variety of accounting return variables. Karels and Sackley (1993) find a similar relationship in the U.S. banking industry. Baginski and Wahlen (2003) show that accounting betas are significantly related to the priced risk premiums in univariate regressions.…”

International diversification and Microfinance

“…the benchmark). However, Karels and Sackley (1993) analyze the relationship between market betas and accounting betas in the US banking industry and have found significant correlations. In addition, in the short run, returns from MFI investment are based on past performance, e.g.…”

Can Microfinance Reduce Portfolio Volatility?

“…Several studies 12 have analyzed the relationship between accounting betas and market betas, and have generally found significant correlations. For example, one study finds significant correlations between accounting betas and market betas in the banking industry, ranging from thirty to sixty percent, depending on the market index employed [Karels and Sackley, 1993]. Such empirical evidence combined with the approach of using parameters of emerging market institutions in general as well as emerging market commercial banks as benchmarks, suggests that it is possible to derive -at least in terms of relative market risk -meaningful conclusions from this approach.…”

“…Variables 1 and 2 are used as profitability indicators, and variables 3 and 4 indicate changes in the value of assets, while variable 5 is an indicator of the 12 See, for example, Ball and Brown (1996), Beaver, Kettler and Scholes (1970), Gonedes (1973), Beaver and Manegold (1975), Kulkarni, Powers and Shanon (1991) and Karels and Sackley (1993) 13 Measured in terms of portfolio at risk > 30 days / gross loans for MFIs and impaired loans / gross loans for EMCBs loan portfolio quality. Variables 1 to 5 for financial institutions (variables 1 to 3 for non-financial institutions) are assumed to capture key changes in the fundamental value of an institution, which ultimately defines its market value.…”