Valuation of bank holding companies

Abstract

We examine the stock market valuation of large and systemic U.S. bank holding companies over a decade before and after the financial crisis. We establish a dynamic relationship between the price – to – book (PB) ratio of equity and the cost of equity, expected growth of net income and dividend payout ratio. We also find large heterogeneity in the degree to which PB ratios are temporarily above or below their long – run equilibrium valuation. These divergences are persistent and systematically related to bank balance sheet characteristics, market sentiment as well as the three aforementioned fundamentals. PB ratios under – react to changes in fundamental variables. Also, we find preliminary evidence for future stock return predictability.