Accounting Income and Market Prices: Explaining Core‐Deposit Premiums

Abstract

Core‐deposit franchises usually fetch substantial premiums when placed on the market. Those premiums are consistent with the “core‐deposit hypothesis:” because of limitations on competition (rationing of charters), deposits provide below‐market funds to financial intermediaries (Spellman, 1982, Chapter 3). However, two other hypotheses can explain core‐deposit premiums. The first holds that generally accepted accounting principles (GAAP) misallocate the costs of developing a core‐deposit base, by charging such costs against current income rather than capitalizing them as an asset; core‐deposit premiums merely represent a normal return to the costs of developing a core‐deposit base. The second holds that core‐deposit premiums arise from banks' good reputation (“goodwill”). A test which can discriminate between the three hypotheses is needed.

Citation

Carhill, M. (1997), "Accounting Income and Market Prices: Explaining Core‐Deposit Premiums", Managerial Finance, Vol. 23 No. 2, pp. 42-64. https://doi.org/10.1108/eb018608