How Much Credit (or Blame) Should Management Receive When a Bank’s Price-Earnings Ratio Improves (or Weakens)?

Abstract

Total return for the stock market can be divided into two components: “fundamental return” and “speculative return.” We examine how information on managerial performance might be obtained ex post by splitting speculative return into “industry-specific” and “firm-specific” components when applying this analysis to an individual stock. Specifically, it can help distinguish management’s contributions to total return versus general market factors. This analysis could be frequently used to evaluate the performance of a community bank’s stock and its management because of the large number of small banks operating in the United States. Plus, implementation of this analysis is facilitated by the readily available price-to-earnings benchmarks for banks.