The Market Valuation of Bank Shares: With Implications for the Value Additivity Principle

This paper examines the capital market's pricing of cash flow producing activities of U.S. banks. A multiple regression methodology is used in conjunction with an extensive, cross section‐time series data set spanning the years 1974 through 1991. This data set and methodology provide the basis for a unique test of the value additivity principle as well as insight into how banks have responded to the changing technological, competitive and regulatory environments. Overall the results support the value additivity principle until 1983. However, statistically significant deviations from the value additivity principle are identified across all subgroups beginning in 1984. Important product innovations, changing technology, and regulatory and competitive changes appear to have provided banks with greater opportunities and incentives for the expansion and linkage of cash flow producing activities.