Betting against bank profitability

Journal article


Akhtaruzzaman, Md, Chiah, Mardy, Docherty, Paul and Zhong, Angel. (2021). Betting against bank profitability. Journal of Economic Behavior and Organization. 192, pp. 304-323. https://doi.org/10.1016/j.jebo.2021.10.012
AuthorsAkhtaruzzaman, Md, Chiah, Mardy, Docherty, Paul and Zhong, Angel
Abstract

There is an ongoing debate about the economic implications of excessive bank risk-taking and profitability. We examine this issue from the perspective of bank shareholders. Contrary to evidence for non-financial stocks, we find that operating profitability is negatively related to risk-adjusted bank stock returns. This negative relationship can be attributed to the nature of the banking business, where profit and systematic risk are intrinsically linked, and the previously documented ‘betting against beta’ anomaly. We further demonstrate that more profitable banks are riskier and therefore have greater demand from leverage-constrained investors, resulting in higher valuations and lower than expected subsequent returns. The negative relationship between profitability and risk-adjusted returns is increasing in bank scale, as moral hazard problems and the use of market-based activities accentuate the link between profit and systematic risk in large banks.

Keywordsbanks; profitability; risk-taking; betting against beta
Year2021
JournalJournal of Economic Behavior and Organization
Journal citation192, pp. 304-323
PublisherElsevier BV
ISSN0167-2681
Digital Object Identifier (DOI)https://doi.org/10.1016/j.jebo.2021.10.012
Scopus EID2-s2.0-85118357267
Research or scholarlyResearch
Page range304-323
Publisher's version
License
All rights reserved
File Access Level
Controlled
Output statusPublished
Publication dates
Online30 Oct 2021
Publication process dates
Accepted17 Oct 2021
Deposited05 Jul 2022
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