Abstract
Several studies in empirical literature have examined the differences between large banks and small banks. In this study, we examine the differences in the day-of-the-week effects of stock prices of large banks as represented by the Keefe, Bruyette and Woods Index (KBW) and small banks as represented by the American Bankers Association NASDAQ Community Bank Index (ABAQ) in three successive economic periods: the pre-recession, recession and the post-recession. We find that the stock return movements of the two indices are similar to each other. Both the indices have very similar weekday effects in all three periods. We conclude that while there is more volatility in the KBW index, it is not reflected in any higher returns for larger bank shareholders. We further provide evidence that the ABAQ index and the KBW index levels are cointegrated which explains why the results on the returns appear so similar to each other.
Highlights
There were 14,388 commercial banks in the United States in 1984
While several studies have examined the impact of these changes on large banks and their smaller counterparts and the results are mixed, no major study has looked at the differences in the day-of-the-week effects for large banks and their smaller counterparts
We compare the performance of large bank stocks as represented by the Keefe, Bruyette and Woods Index (KBW hereafter) and small banks as represented by the American Bankers Association NASDAQ Community Bank Index (ABAQ hereafter)
Summary
There were 14,388 commercial banks in the United States in 1984. This total shrunk to 6,177 banks at the end of 2011 (Note 1). Nippani and Washer (2005) studied the impact of Interstate Branching and Banking Efficiency Act (IBBEA) implementation on the relative profitability of small banks and find that small banks’ return on assets was significantly less than their larger counterparts in the post-IBBEA period. McGrane (2012) discusses a routine conference call between bankers and regulators in the United States wherein some bankers representing community banks voiced concerns about regulators new rules with regard to capital rules following the signing of Basel III She mentions “Small lenders say the elaborate Basel III system was designed to rein in large, internationally active banks that brought the financial system to its knees, not small community institutions.”. The recession period is from December 1, 2006 to June 30, 2009; and the post-recession period is from July 1, 2009 to February 10, 2012
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