Response to “Discussion of ‘How Sensitive Are Bank Market Values to Regulatory Adjustments of Capital?’”

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We provide a detailed response to Ines Simac's ( 2024 ) discussion of our study on the sensitivity of bank market values to regulatory adjustments (RAs) of capital. Initially, we investigated the relevance of these adjustments, motivated by ongoing changes in the definition of bank capital aimed at ensuring financial stability. Our research utilized log-log models to address the challenges of alternative methodologies that may not effectively capture the value relevance of bank capital and RAs. Our results underscore the stability and predictability of coefficients that measure value relevance. We further explore the valuation perspective, distinguishing between a “valuation” model for a theory of the relation between market and accounting values and a statistical model that estimates the sensitivity of market values to changes in accounting variables. We advocate for the use of log-log models due to their robustness in estimating response coefficients as elasticities. This approach minimizes issues related to scale and distribution assumptions inherent in additive-linear models. We also address minor points raised in the discussion, including the coefficient values of goodwill and Tier 2 capital. Our findings contribute to a nuanced understanding of how regulatory adjustments influence bank valuations, offering implications for both academic research and regulatory policy.