In Are Large Banks Valued More Highly?, we investigate whether the value of large banks, defined as banks with assets in excess of the Dodd-Frank threshold for enhanced supervision ($50 billion in 2010 constant dollars), increases with the size of their assets, using Tobin’s q and market-to-book as our valuation measures. There is a widely-held view that banks gain from becoming large enough to obtain access to a stronger regulatory safety net in the form of “too-big-to-fail” (TBTF) subsidies. If this view holds, large banks should be valued more because they have an asset that other banks do not have, namely a claim on public resources, and the value of this asset grows as these banks become larger. Yet, this popular view ignores the possibility that large banks may bear larger costs than other banks because they are TBTF. For example, these costs may be in the form of greater regulatory scrutiny, political risk, or regulatory requirements that force them to pursue suboptimal policies. With these potential higher costs, the issue of whether TBTF banks are valued more highly is an empirical matter.
Posted by Alvaro Taboada, Mississippi State University, and René Stulz, The Ohio State University, on Tuesday, March 28, 2017
Editor's Note: Alvaro Taboada is Assistant Professor of Finance at Mississippi State University, and René Stulz is Everett D. Reese Chair of Banking and Monetary Economics and the Director of the Dice Center for Research in Financial Economics at The Ohio State University Fisher College of Business. This post is based on a recent paper authored by Professor Taboada, Professor Stulz, and Bernadette A. Minton, Professor of Finance and Arthur E. Shepard Endowed Professor in Insurance at The Ohio State University Fisher College of Business.