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The leverage anomaly in U.S. bank stock returns

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  • Venmans, Frank

Abstract

This article examines the relationship between capital ratios and returns on US bank stocks between 1973 and 2019. Banks with low capital ratios do not have higher, but rather lower returns than banks with intermediate levels of capital. This is not explained by standard risk factors. As a result, risk-adjusted returns (alphas) of lowcapital banks are negative. Moreover, the stock returns exhibit a delayed reaction to changes in capital ratios. Low-capital banks that further increase their debt have high abnormal returns on the day of announcement, but tend to have low risk-adjusted returns in the 9 months that follow. The paper uncovers several explanations for this leverage anomaly: under-priced default risk, under-priced systematic risk and sensitivity to idiosyncratic volatility.

Suggested Citation

  • Venmans, Frank, 2021. "The leverage anomaly in U.S. bank stock returns," LSE Research Online Documents on Economics 111907, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:111907
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    More about this item

    Keywords

    asset pricing anonaly; bank regulation; capital requirements; leverage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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