Bank valuation and size: Evidence from Japan

This study empirically analyzes whether the valuation of large commercial banks increases with their size. We investigate publicly listed banks in Japan because the Japanese financial system is known to be bank-centered and has several large-sized banks that can be treated as "too-big-to-fail" (TBTF). Our results weakly support the positive relationship between size and Tobin's q for Japanese banks, different from banks in the United States. This implies that a kind of TBTF premium exists, owing to the safety-net function of Japanese banks. However, the benefits of the TBTF premium vanish after controlling for bank fixed effects. Thus, we conjecture that Japanese TBTF banks engage in riskier bank activities, which results in lowering their valuations, as in the case of U.S. banks.