Essays on finance: Drivers of bank performance and the international cost of equity

This dissertation examines how the way banks function relates to their performance before, during, and after the recent financial crisis in an attempt to understand the causes of that crisis and what we might learn from it. It consists of four substantive chapters, 2-5, preceded by an introductory chapter. Chapter 2 analyzes the role of governance and behavioral dimensions in the ability of the largest U.S. banks to withstand the financial crisis independently. While these banks did not differ in terms of formal governance, I document how differences in certain behavioral dimensions, especially a CEO’s socio-economic background, are related to the banks’ crisis performance. Subsequently, Chapter 3 investigates the relationship between bank returns before and after the financial crisis. In the U.S., I document
that the strong-performing banks from before the crisis have lagged behind since. Moreover, those banks also demonstrated large pre-crisis loan growth. I conclude that pre-crisis winners have been unable to adapt their pre-crisis, high-risk, business model to the post-crisis lower-risk environment. In Europe, by contrast, pre- and post-crisis performance is positively related. In Chapter 4, I shift my attention to bank performance around CEO turnover. In the initial years of a new CEO, bank performance declines, which can be fully explained by an increase in provisions for bad loans. Finally, Chapter 5 considers a firm’s cost of equity in international markets, a firm characteristic that is crucial for banks when valuing firms and assessing their risk profile. My research shows that it matters materially whether an international or national version of the Capital Asset Pricing Model (CAPM) is used to determine the value of the cost of equity. Considering the increased integration of financial markets, I therefore recommend the use of the international CAPM.