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Can the Book-to-Market Ratio Signal Banks’ Earnings and Default Risk? Evidence Around the Great Recession

Author

Listed:
  • Bhanu Balasubramnian

    (The University of Akron)

  • Ajay A. Palvia

    (Office of the Comptroller of the Currency)

  • Dilip K. Patro

    (Federal Deposit Insurance Corporation)

Abstract

We examine the association between the book-to-market (B/M) ratio and the subsequent earnings and default risk of US banks in the period around the Great Recession. We find that banks with higher B/M ratios have consistently lower future earnings and greater earnings volatility. In addition, these banks have higher loan delinquency, more charge-offs, and lower Z-scores. We show that the B/M ratio signals information about a bank’s earnings and default risk about four to nine quarters before actual poor performance. Thus, the results show that the B/M ratio can provide advance signals for market monitoring of banks.

Suggested Citation

  • Bhanu Balasubramnian & Ajay A. Palvia & Dilip K. Patro, 2019. "Can the Book-to-Market Ratio Signal Banks’ Earnings and Default Risk? Evidence Around the Great Recession," Journal of Financial Services Research, Springer;Western Finance Association, vol. 56(2), pages 119-143, October.
    • Handle: RePEc:kap:jfsres:v:56:y:2019:i:2:d:10.1007_s10693-018-0299-4
    DOI: 10.1007/s10693-018-0299-4
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    More about this item

    Keywords

    Market discipline; Bank performance; Risk assessment; Book-to-market ratio;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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