Working Paper: NBER ID: w12918
Authors: Charles W. Calomiris; Doron Nissim
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.
Keywords: No keywords provided
JEL Codes: G12; G21; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| model's residuals from cross-sectional regressions of market-to-book values (C21) | predictive of future stock returns (G17) |
| trading costs (F12) | predictable future variations in returns (G17) |
| persistence of noninterest income (G29) | valuation (D46) |
| loan valuation (G32) | bank performance (G21) |
| valuation model (D46) | actual market performance (G10) |