Paper by Christos A. Makridis, Brian Clark, Bill Francis, and Majeed Simaan

This paper introduces a novel bank-specific complexity index based on balance sheet composition to assess the impact of operational complexity on equity pricing in the banking sector. Utilizing Fama-MacBeth regressions and portfolio sorting techniques, we find that operational complexity significantly influences the cross-sectional variation in bank stock returns, with larger, more complex banks exhibiting lower abnormal returns compared to their less complex counterparts. The analysis further explores the role of interdependencies within the banking system as a mechanism through which complexity affects equity valuation. Our findings highlight the detrimental effects of complexity on price efficiency, particularly for large banks, and suggest that interbank interconnectedness exacerbates these effects. This research contributes to the understanding of how bank operational complexity and systemic interconnectedness influence risk assessment and equity pricing.