New publication for Prof. Fahlenbrach
12.10.17 - The paper, “Why does fast loan growth predict poor performance for banks?”, is coauthored with Robert Prilmeier of Tulane University and Rene Stulz of Ohio State University, and has been accepted for publication in the Review of Financial Studies, one of the top three journal of this field.
From 1973 to 2014, the common stock of U.S. banks with loan growth in the top quartile of banks over a three-year period significantly underperforms the common stock of banks with loan growth in the bottom quartile over the next three years. After the period of high growth, these banks have a lower return on assets and increase their loan loss reserves. The poorer performance of fast growing banks is not explained by merger activity. The evidence is consistent with banks, analysts, and investors being over-optimistic about the risk of loans extended during bank-level periods of high loan growth.
The paper is available online.