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Betting against bank profitability
Akhtaruzzaman, Md Chiah, Mardy Docherty, Paul Zhong, Angel
Akhtaruzzaman, Md
Chiah, Mardy
Docherty, Paul
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.
Keywords
banks, profitability, risk-taking, betting against beta
Date
2021
Type
Journal article
Journal
Book
Volume
192
Issue
Page Range
304-323
Article Number
ACU Department
Peter Faber Business School
Faculty of Law and Business
Faculty of Law and Business
Collections
Relation URI
Source URL
Event URL
Open Access Status
License
All rights reserved
File Access
Controlled