Factors affecting stock market performance with special reference to market-to-book ratio in banking-the Israeli case

One of the important factors affecting stock returns is the market-to-book ratio. In banking, the ratio has also been taken to be a proxy for the charter value of banks. The purpose of the paper is to derive and estimate empirically the factors that determine relative values of equity in banking. Our analytical framework is based on the discounted cash flow (DCF) approach of valuation. In our empirical test, we use data on Israeli banks. The main results are that risk, return and market and economic conditions have a significant effect on the ratio.