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Are the Largest Banks Valued More Highly?

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  • Bernadette A Minton
  • René M Stulz
  • Alvaro G Taboada

Abstract

Some argue too-big-to-fail (TBTF) status increases the value of the largest banks. In contrast, we find that the value of the largest banks is negatively related to asset size in normal times, but much less so during the crisis. Further, shareholders lose when large banks cross a TBTF threshold through acquisitions. The negative relation between bank value and bank size for the largest banks cannot be explained by differences in ROA, ROE, equity volatility, tail risk, distress risk, or equity discount rates, but it can be partly explained by the market’s discounting of trading activities.Received December 20, 2017; editorial decision November 14, 2018 by Editor Itay Goldstein.

Suggested Citation

  • Bernadette A Minton & René M Stulz & Alvaro G Taboada, 2019. "Are the Largest Banks Valued More Highly?," Review of Financial Studies, Society for Financial Studies, vol. 32(12), pages 4604-4652.
  • Handle: RePEc:oup:rfinst:v:32:y:2019:i:12:p:4604-4652.
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Andrew G. Atkeson & Adrien d’Avernas & Andrea L. Eisfeldt & Pierre-Olivier Weill, 2019. "Government Guarantees and the Valuation of American Banks," NBER Macroeconomics Annual, University of Chicago Press, vol. 33(1), pages 81-145.
    2. René M. Stulz, 2019. "FinTech, BigTech, and the Future of Banks," Journal of Applied Corporate Finance, Morgan Stanley, vol. 31(4), pages 86-97, December.
    3. Filippo Curti & W. Scott Frame & Atanas Mihov, 2020. "Are the Largest Banking Organizations Operationally More Risky?," Working Papers 2016, Federal Reserve Bank of Dallas, revised 29 May 2020.
    4. Robert McKeown, 2017. "Where Are The Economies Of Scale In Canadian Banking?," Working Paper 1380, Economics Department, Queen's University.
    5. Bai, Jennie & Goldstein, Robert S. & Yang, Fan, 2019. "The leverage effect and the basket-index put spread," Journal of Financial Economics, Elsevier, vol. 131(1), pages 186-205.
    6. Samuel Antill & Asani Sarkar, 2018. "Is size everything?," Staff Reports 864, Federal Reserve Bank of New York.
    7. Anna Kovner & Peter Van Tassel, 2018. "Evaluating regulatory reform: banks’ cost of capital and lending," Staff Reports 854, Federal Reserve Bank of New York.
    8. Robert McKeown, 2017. "Costs, Size And Returns To Scale Among Canadian And U.s. Commercial Banks," Working Paper 1382, Economics Department, Queen's University.
    9. Michael Donadelli & Patrick Grüning & Steffen Hitzemann, 2019. "Understanding Macro and Asset Price Dynamics During the Climate Transition," Bank of Lithuania Discussion Paper Series 18, Bank of Lithuania.
    10. Dávila, Eduardo & Walther, Ansgar, 2020. "Does size matter? Bailouts with large and small banks," Journal of Financial Economics, Elsevier, vol. 136(1), pages 1-22.
    11. Eduardo Dávila & Ansgar Walther, 2017. "Does Size Matter? Bailouts with Large and Small Banks," NBER Working Papers 24132, National Bureau of Economic Research, Inc.
    12. Robert McKeown, 2017. "An Overview Of The Canadian Banking System: 1996 To 2015," Working Paper 1379, Economics Department, Queen's University.

    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • 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
    • G3 - Financial Economics - - Corporate Finance and Governance

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