What is the role of market valuation in bank stock returns? The ratio of book value to market value of equity (BTM) is often used as an indicator for firms’ future earnings capacity. Put another way, if investors have a favourable view ill push up the price of its stock, thus lowering its cost of equity and creating incentives for managers to undertake additional investment. By contrast, financial stress would coincide with rising BTM ratios. From 2008, the BTM ratio rose around 50% for most banks in the sample (Graph 2). The increases were particularly pronounced for German,.
