Mendoza College of Business
University of Notre Dame
NBER Working Papers and Publications
|June 2016||Equity is Cheap for Large Financial Institutions: The International Evidence|
with Hanno Lustig, Alberto Plazzi: w22355
In most countries, equity is a cheap source of funding for a country’s largest financial institutions. On average, the stocks of the top 10% financial companies in a country account for over a quarter of total market capitalization, but these stocks earn returns that are significantly lower than stocks of non-financial firms of the same size and with the same risk exposures. In a bailout-augmented asset pricing model with rare disasters, country characteristics that inform the likelihood of a bailout should predict stock returns. We find greater financial pricing anomalies for the largest banks in developed countries with a highly concentrated and large banking sector and fiscally strong governments, but smaller anomalies in countries with strong corporate governance, government integrity,...
|November 2010||Size 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