LAUSR

I empirically evaluate the information content of a change in the size of a bank’s loan portfolio. I find a positive (negative) stock market reaction to loan portfolio growth in high (low) earnings banks. I also find that the information content of loan growth depends on features of the bank, the loan, and the macroeconomic state. In particular, loan growth, in conjunction with earnings, conveys meaningful information about bank value for small banks only, for commercial loans, and during normal times. Further, I posit that if the market reaction conveys meaningful information about a bank’s value, then loan portfolio growth should predict future performance measures of the bank. In fact, I find that loan portfolio growth, when interacted with earnings, predicts future non-performing loans.