NBER Publications by Priyank Gandhi

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June 2016Equity is Cheap for Large Financial Institutions: The International Evidence
with Hanno Lustig, Alberto Plazzi: w22355
Equity is a cheap source of funding for a country's largest financial institutions. In a large panel of 31 countries, we find that the stocks of a country's largest financial companies earn returns that are significantly lower than stocks of non-financials with the same risk exposures. In developed countries, only the largest banks' stock earns negative risk-adjusted returns, but, in emerging market countries, other large non-bank financial firms do. Even though large banks have high betas, these risk-adjusted return spreads cannot be attributed to the risk anomaly. Instead, we find that the large-minus-small, financial-minus-nonfinancial, risk-adjusted spread varies across countries and over time in ways that are consistent with stock investors pricing in the implicit government guarantee...
November 2010Size Anomalies in U.S. Bank Stock Returns: A Fiscal Explanation
with Hanno Lustig: w16553
The largest commercial bank stocks, ranked by total size of the balance sheet, have significantly lower risk-adjusted returns than small- and medium-sized bank stocks, even though large banks are significantly more levered. We uncover a size factor in the component of bank returns that is orthogonal to the standard risk factors, including small-minus-big, which has the right covariance with bank returns to explain the average risk-adjusted returns. This factor measures size-dependent exposure to bank-specific tail risk. These findings are consistent with government guarantees that protect shareholders of large banks, but not small banks, in disaster states.

Published: Size Anomalies in U.S. Bank Stock Returns PRIYANK GANDHI andHANNO LUSTIG† Article first published online: 12 MAR 2015 DOI: 10.1111/jofi.12235 © 2015 the American Finance Association Issue The Journal of Finance The Journal of Finance Volume 70, Issue 2, pages 733–768, April 2015

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