How does bank opacity affect credit growth and return predictability?
Year: 2024
Type: article
Abstract: Prior research finds that bank credit growth predicts lower bank equity returns in subsequent one to three years. Stocks of banks with high credit growth are initially overvalued because of overoptimism or elevated sentiment of bank shareholders. Eventually, these stocks underperform, generating lower returns. We argue that shareholder sentiment should exhibit its strongest effects on the performance of bank stocks when banks are opaque, or there is uncertainty about the quality of bank loans. Accordingly, we show that an increase in bank’s financial reporting opacity amplifies the predictive ability of credit growth for equity returns by 3 to 4 times relative to when opacity is at its mean.
Source: Journal of Empirical Finance
Authors: Arpit Kumar Parija, Malvika Chhatwani
Institution: Xavier School of Management
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $2,850
OpenAlex ID: W4402565349