Accounting and Finance Seminars: Professor Rüdiger Fahlenbrach
Professor Rüdiger Fahlenbrach (Swiss Finance Institute)
G.15, 15-19 Tyndalls Park Road
Title: Why do banks that have grown quickly perform poorly?
From 1973 to 2014, the common stock of U.S. banks with asset growth in the top quartile of banks over a three-year period significantly underperforms the common stock of banks with asset growth in the bottom quartile over the next three years. The benchmark-adjusted cumulative difference in performance over three years exceeds ten percentage points. The explanation for this difference in performance is that the fast-growing banks make worse loans. As a result, these banks have lower return on assets and higher loan loss reserves. The poorer performance of the fast growing banks is not explained by merger activity and loan growth through mergers is not accompanied by the same poor loan performance. We find evidence that analysts are surprised by the poor performance of fast-growing banks.