Equity is Cheap for Large Financial Institutions: The International Evidence

79 Pages Posted: 20 Jun 2016 Last revised: 30 Jan 2023

See all articles by Priyank Gandhi

Priyank Gandhi

Rutgers University, New Brunswick

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Alberto Plazzi

Universita' della Svizzera italiana; Swiss Finance Institute

Date Written: June 2016

Abstract

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, and property rights as well as high bankruptcy costs. The pricing discrepancy widens in anticipation of large stock market and GDP declines, as the bailout-augmented asset pricing model would predict.

Suggested Citation

Gandhi, Priyank and Lustig, Hanno N. and Plazzi, Alberto, Equity is Cheap for Large Financial Institutions: The International Evidence (June 2016). NBER Working Paper No. w22355, Available at SSRN: https://ssrn.com/abstract=2797949

Priyank Gandhi (Contact Author)

Rutgers University, New Brunswick ( email )

New Brunswick, NJ
United States

Hanno N. Lustig

Stanford Graduate School of Business ( email )

Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alberto Plazzi

Universita' della Svizzera italiana ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

HOME PAGE: http://usi.to/mpy

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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