Equity is cheap for large financial institutions

Priyank Gandhi, Hanno Lustig, Alberto Plazzi

Research output: Contribution to journalReview articlepeer-review

12 Scopus citations


Across a wide panel of countries, the top-10% of financial stocks on average account for over 20% of a country’s market capitalization but earn on average significantly lower returns than do nonfinancial firms of the same size and risk exposures. In a bailout-augmented, rare disasters asset pricing model, the spread in risk-adjusted returns between large and small institutions depends on country characteristics that determine the likelihood of bailouts. Consistent with this model, we find larger spreads in countries with large and interconnected financial sectors, weaker capital regulation and corporate governance, and fiscally stronger governments. Valuation gaps increase in anticipation of financial crises.

Original languageEnglish (US)
Pages (from-to)4231-4271
Number of pages41
JournalReview of Financial Studies
Issue number9
StatePublished - Sep 1 2020

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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