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Review of Financial Studies Vol. 31 No. 3 2018

Why Does Fast Loan Growth Predict Poor Performance for Banks?

Rüdiger Fahlenbrach1; Robert Prilmeier2; René M. Stulz3

1 Ecole Polytechnique Fédérale de Lausanne (EPFL), Swiss Finance Institute, and ECGI · 2 A.B. Freeman School of Business, Tulane University · 3 Fisher College of Business, The Ohio State University, NBER, and ECGI ,

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Abstract

From 1973 to 2014, the common stock of U.S. banks with loan growth in the top quartile of banks over a three-year period significantly underperformed the common stock of banks with loan growth in the bottom quartile over the next three years. After the period of high growth, these banks have a lower return on assets and increase their loan loss reserves. The poorer performance of fast-growing banks is not explained by merger activity. The evidence is consistent with banks, analysts, and investors being overoptimistic about the risk of loans extended during bank-level periods of high loan growth. Received September 14, 2016; editorial decision May 28, 2017 by Editor Itay Goldstein.

DOI
10.1093/rfs/hhx109
Volume
31
Issue
3
Pages
1014-1063
Language
en
Sources
crossref openalex

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