Modeling Structural and Temporal Variation in the Market's Valuation of Banking Firms




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    • Kane is Everett D. Reese Professor of Banking and Monetary Economics, The Ohio State University, and a Research Associate, National Bureau of Economic Research. Unal is an Assistant Professor of Finance, University of Maryland. The authors wish to thank Warren Bailey, James Barth, Stephen Buser, Eric Chang, Mark Flannery, David Mayers, Joseph Sinkey, René Stulz and two anonymous referees for valuable criticism of earlier drafts of this paper. These earlier drafts circulated under different titles and were presented at the 1987 meeting of the Financial Management Association, the Federal Reserve Bank of Chicago's 1987 Conference on Bank Structure and Competition, the 1988 Meeting of the Western Finance Association, Arizona State University, and the University of Maryland. Opinions expressed are the authors' and should not be construed to represent the views of the NBER.


Hidden capital exists whenever the accounting measure of a firm's net worth diverges from its economic value. Such unbooked capital has on-balance-sheet and off-balance-sheet sources. This paper develops a model to estimate both forms of hidden capital and to test hypotheses about their determinants. In effect, the analysis expands the two-index model by endogenizing the market and interest-rate sensitivities of any stock and decomposing each sensitivity into on-balance-sheet and off-balance-sheet elements. For a sample of banks during 1975–1985, the model finds considerable variation in both forms of hidden capital.