Application of Excess Return Model in Valuing Public Sector Banks of India: An Empirical Study.

The main purpose of the paper is to empirically estimate the value of equity in the case of public sector banks of India using excess return model. The paper also attempts to identify the key driver of value of equity among these banks. A sample of 11 public sector banks included in NIFTY PSU Bank Index was selected for the study. The study covered a time period of ten years ranging from 2007 to 2016. All the financial data pertaining to the banks was culled from CMIE Prowess software. One sample t-test and F-test were applied to test the significance of the value of equity of each bank and the entire sample, respectively. To identify the key driver of value of equity, a stepwise multiple regression was run between the dependent variable and a set of independent variables. The results of the study highlight that none of the 11 banks registered positive mean value of equity during the study period. The results are same for the entire sample. The study reveals that return on net worth is the positively significant predictor of the value of equity. On the contrary, stock beta, shareholder return, and operating profit to working funds ratio are negatively significant. The chief implication of the study is that higher return on net worth leads to increase in the value of equity of the banks. [ABSTRACT FROM AUTHOR]