Abstract
We study how the misvaluation of banks affects their loan supply by considering proprietary data on 83 banks from 11 euro-area countries from 2010Q1 to 2019Q4. We measure bank market value by the Tobin’s Q and identify the impact of nonfundamental changes in bank market value by saturating our specifications with observable bank fundamentals and analyst forecasts on future bank performance as well as several fixed effects. We show that nonfundamental rises in market value lead a bank to increase its loan supply to firms and households, even when the bank’s capital structure constraint is not binding. Our findings are consistent with a mechanism in which bank managers cater to the misperceptions of stock market investors.
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Notes
For a review of the literature, see Baker and Wurgler (2013).
These filters eliminate special institutions, whose business model departs from traditional banking. For instance, MFIs that raise funding only on the financial market and that mainly grant loans to other banks, or banks heavily specialized in consumer finance which are funded via other banks.
Specifically, Houston et al. (1997) document that the loan growth of subsidiary banks is more sensitive to the cash flow and capital position of their holding company than to their own cash flow and capital position. Campello (2002) finds that internal capital markets relax the funding constraints faced by smaller subsidiaries, while Ehrmann and Worms (2004) show that small German banks access the interbank market indirectly through their head of the group. Consequently, as shown by Ashcraft (2008), belonging to a banking group is a source of financial strength.
Note that the procedure does not concern the Tobin’s Q, for which we require to have always non-missing values.
Table A2 of the Online Appendix lists the banks in the sample and the banking group to which they belong.
Note that, ideally, we should consider as outcome variables seasoned equity offerings and share repurchases. The change in the log of capital and reserves is a coarse proxy for them, but has the advantage of being easily obtainable from the IBSI data set.
In the case of equity funding as a dependent variable, the estimated parameter on the Tobin’s Q at \(t-1\) loses its statistical significance but conserves the positive sign.
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Acknowledgements
This paper previously circulated under the title “Bank Equity Value and Loan Supply.” We thank Charles Calomiris, Ettore Croci, John Kandrac, Nikolaos Karagiannis and Joslem Ngambou for helpful comments. We also thank conference participants at the 5th EFiC Conference in Banking and Corporate Finance, 37th International Symposium on Money, Banking and Finance (GdRE) and 37th International Conference of the French Finance Association, and seminar participants at the University of Zurich and Central Bank of Ireland for valuable feedback. The views expressed herein are those of the authors and should under no circumstances be interpreted as reflecting those of the Banque de France or the Eurosystem.
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Girotti, M., Horny, G. Bank Market Value and Loan Supply. J Financ Serv Res (2024). https://doi.org/10.1007/s10693-024-00430-0
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DOI: https://doi.org/10.1007/s10693-024-00430-0