Essays on Bank Valuation in the U.S.
Accuracy of Relative Valuation Methods in the U.S. Banking Sector: In our paper we examine the accuracy of relative valuation methodologies in assessing equity values of U.S. banks. The methodologies we use include price-and book-based multiples, including forward-looking and historical earnings, adjusted book values and multiples, conditioned on a number of bank-specific fundamental factors. Our results indicate that over a twenty-year period from 2000 to 2020, price-to-tangible book and price-to-forward earnings multiples, conditioned on fundamental bank-specific and macro factors have exhibited the higher levels of accuracy in estimating banks’ market prices. On an unadjusted basis, forward earnings-based multiples show superior performance vis-à-vis historical earnings-based multiples, book-based multiples, and tangible book-based multiples. Our findings also suggest that while conditioning forward earnings-based multiples on several fundamental factors improves the accuracy of valuation estimates, the incremental precision may not be enough to justify the additional level of complexity in estimating the conditional multiple model. Additionally, the conditional tangible-book based modelcan be used as a practical tool in stand-alone as well as strategic acquisition-related valuation exercises, especially those, requiring decomposition of bank’s equity value into its underlying components, and helping to form an understanding of how equity market participants price banks’ earning potential, growth prospects, credit quality of their loan portfolios, market risk and other fundamental dimensions.
Determinants of Market Reaction to M&A Activity in the U.S. Banking Sector: In this paper we study 716 strategic bank acquisitions in the U.S. banking sector space from 2001 to 2020 in order to analyze factors that drive and explain market reaction to the announcements of acquisitions to the shareholders of acquiring banks. We introduce and test the new measure of transaction premium, using the model-implied valuation methodology for target banks and show that this metric is a significant explanatory factor vis-à-vis the market reaction to the announcement of bank acquisitions. Furthermore, we show that the model-implied transaction premium is a superior measure as compared to the premium paid over the market-observed price of the target bank. Our results also show that factors identified and analyzed in prior research of U.S. bank mergers have statistically significant explanatory powerand that targets’mis-valuation is not the only factor that has an impact on the excess return to the acquiring bank. We show that the acquirors’post-merger announcement returns are positively related to the use of cash in transaction financing, are higher for focused transactions and, at the same time, are negatively related to the more complex corporate structures of the acquiring banks, to the pre-transaction performance of target banks, and to the presence of higher volatility in the equity market. Our results indicate that market participants understand the potential gaps between target banks’ warranted and market valuations and can essentially “see through”the announced transaction premium in the market for corporate control, as they make use of the warranted valuation information in the choice of their reaction to transaction announcements.
Supervisor: Arnt Verriest, KU Leuven (formerly EDHEC Business School)
External reviewer: Andrey Golubov, Rotman, University of Toronto
Other committee members: Emmanuel Jurczenko and Enrique Schroth, EDHEC Business School