Why Does Fast Loan Growth Predict Poor Performance for Banks?

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 underperformed 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 overoptimistic about the risk of loans extended during bank-level periods of high loan growth.

Published in:
The Review of Financial Studies, 31, 3, 1014-1063
Mar 01 2018
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 Record created 2018-10-09, last modified 2019-12-05

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