Balance-Sheet Ratios and Stock Returns: An Analysis for Italian Banks

Abstract

The paper assesses whether the monthly returns of the listed shares of Italian banks are predicted by changes in balance-sheet indicators. The sample covers the period from January 1997 to June 2003. Estimates use both unadjusted and risk-adjusted returns. Results show that the stock returns of Italian banks are positively related to past profitability, liquidity, and asset quality, while they are not significantly affected by banks' capital ratios. Furthermore, in the sample period an increase in traditional lending activity leads to higher stock returns.