Working Paper: NBER ID: w24706
Authors: Andrew G. Atkeson; Adrien Davernas; Andrea L. Eisfeldt; Pierre-Olivier Weill
Abstract: Banks' ratio of the market value to book value of their equity was close to 1 until the 1990s, then more than doubled during the 1996-2007 period, and fell again to values close to 1 after the 2008 financial crisis. Sarin and Summers (2016) and Chousakos and Gorton (2017) argue that the drop in banks' market-to-book ratio since the crisis is due to a loss in bank franchise value or profitability. In this paper we argue that banks' market-to-book ratio is the sum of two components: franchise value and the value of government guarantees. We empirically decompose the ratio between these two components and find that a large portion of the variation in this ratio over time is due to changes in the value of government guarantees.
Keywords: bank valuation; government guarantees; market-to-book ratio; franchise value
JEL Codes: G18; G2; G21; G28; G32; G33; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government guarantees (H81) | market-to-book ratio (G32) |
| franchise value (G32) | market-to-book ratio (G32) |
| regulatory changes (G18) | government guarantees (H81) |
| regulatory changes (G18) | market-to-book ratio (G32) |
| decrease in government guarantees (H81) | market-to-book ratio (G32) |
| decrease in franchise value (G32) | market-to-book ratio (G32) |