What Determines Information Content in Bank Stock Price? Global Evidence

Abstract

Enhancing information content in bank stock price not only reduces information asymmetry problem but increases the efficiency of capital allocation and decreases the cost of capital for banks. Importantly, market force and bank regulators rely on that information to supervise banks and further avoid financial volatility. This paper uses bank stock synchronicity (R2 statistics of the expanded market model) to measure the level of bank-specific information content in the bank stock price, and examines the relevant institutional and bank-specific factors influencing it. Using data on 37 countries over the period 1996-2007, we find that bank stocks in countries that are less bank oriented, countries that have explicit depository insurance, and those countries that have higher bank-level disclosure, incorporate more bank-specific information. The result holds for both emerging and developed economy subsamples. Further, in emerging economies, bank stocks in countries with more bank state ownership have less bank-specific information content, similarly, in developed markets, higher banking freedom enhances bank-specific information incorporation.