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THE PREDICTIVE CONTENT OF SECTORAL STOCK PRICES: A US-EURO AREA COMPARISON

Empirical research has found that highly profitable firms face a lower cost of equity funding (for example, Hail and Leuz (2006)). This work has not looked at banks. In the third column of Table 1, we use earnings (defined as net income over equity) to proxy for future profitability. We find that high profitability compresses the market beta. In other words, more profitable banks tend to be less correlated with the market return, facing therefore a lower risk premium. This could reflect the extra buffer that higher profits afford to banks that would like to preserve stable cash distributions to. | EUROPEAN CENTRAL BANK EUROSYSTEM WORKING PAPER SERIES NO 1343 I MAY 2011 THE PREDICTIVE CONTENT OF SECTORAL STOCK PRICES A US-EURO AREA COMPARISON by Magnus Andersson Antonello D Agostino Gabe J. de Bondt and Moreno Roma EUROPEAN CENTRAL BANK EUROSYSTEM WORKING PAPER SERIES NO 1343 I MAY 2011 THE PREDICTIVE CONTENT OF SECTORAL STOCK PRICES A US-EURO AREA COMPARISON 1 by Magnus Andersson Antonello D Agostino Gabe J. de Bondt and Moreno Roma 2 In 2011 all ECB publications feature a motif taken from the 100 banknote. NOTE This Working Paper should not be reported as representing the views of the European Central Bank ECB . The views expressed are those of the authors and do not necessarily reflect those of the ECB. This paper can be downloaded without charge from http www.ecb.europa.eu or from the Social Science Research Network electronic library at http ssrn.com abstract_id 1840568. Ì We are grateful for comments received at an internal ECB seminar and from Julian Morgan and an anonymous referee. 2 All authors European Central Bank Kaiserstrasse 29 D-60311 Frankfurt am Main Germany e-mail addresses magnus.andersson@ecb.europa.eu antonello.dagostino@ecb.europa.eu gabe.de_bondt@ecb.europa.eu and moreno.roma@ecb.europa.eu European Central Bank 2011 Address Kaiserstrasse 29 60311 Frankfurt am Main Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main Germany Telephone 49 69 1344 0 Internet http www.ecb.europa.eu Fax 49 69 1344 6000 All rights reserved Any reproduction publication and reprint in the form of a different publication whether printed or produced electronically in whole or in part is permitted only with the explicit written authorisation of the ECB or the authors. Information on all of the papers published in the ECB Working Paper Series can be found on the ECB s website http www. ecb.europa.eu pub scientific wps date html index.en.html ISSN 1725-2806 online