The Value Relevancy of Nontraditional Bank Earnings

Abstract

Due to the growing range of financial services offered by US bank holding companies, banks are increasingly relying on nontraditional activities to generate income. This study examines the extent to which external capital markets recognize the properties of earnings components resulting from the observed shift. We find that investors are unable to discern between the differential properties in bank earnings components by underweighting both components of income during economic booms and underweighting traditional income during crisis periods. This finding provides evidence which contradicts the view of an efficient market in which stock prices reflect all publicly available information.