Cookies?
Library Header Image
LSE Research Online LSE Library Services

The leverage anomaly in U.S. bank stock returns

Venmans, Frank ORCID: 0000-0002-4264-6606 (2021) The leverage anomaly in U.S. bank stock returns. Journal of International Financial Markets, Institutions and Money. ISSN 1042-4431 (In Press)

[img] Text (The leverage anomaly in US bank stock returns JIFMIMrevision5) - Accepted Version
Pending embargo until 1 January 2100.

Download (687kB) | Request a copy

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.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-i...
Additional Information: © 2021 Elsevier B.V.
Divisions: Grantham Research Institute
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Date Deposited: 13 Sep 2021 14:09
Last Modified: 14 Sep 2021 09:15
URI: http://eprints.lse.ac.uk/id/eprint/111907

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics