AN INTERNATIONAL COMPARISON OF BANKS EQUITY RETURNS

This paper tests implications of banking theory and legal theory for c ross-country differences in banks' equity betas and returns. Banking t heory predicts different risk exposures between transactional banks, f ound in the United States, United Kingdom, Australia, and Canada, and relationship banks, found in Japan, Germany, Switzerland, and the Neth erlands. We find strong empirical support for banking theory's predict ion of different risks and returns between transactional and relations hip banks. Legal theory predicts that differences in banks' equity ris ks depend on the nature of the legal system for protecting the interes ts of outside investors. We find mixed evidence that banks' returns ma y vary by the type of legal system.