Impact of Japanese Banks' Strategic Stockholdings on their Cost of Capital

Kei Ikeda
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Kei Ikeda: Bank of Japan

No 17-E-4, Bank of Japan Working Paper Series from Bank of Japan

Abstract: In this paper, we examine the impact of banks' strategic stockholdings on their cost of equity capital using the framework of Capital Asset Pricing Model (CAPM) theory employing panel data from 2006 to 2015 on internationally active Japanese banks. The results of our analysis show that strategic stockholdings could raise the cost of equity capital. Strategic stockholdings put upward pressure on beta in CAPM theory by increasing the volatility of returns on banks' share prices, and increasing the correlation between returns on banks' share prices and returns on a market portfolio. Although it is argued that the cost of equity capital of Japanese banks is generally higher than that of U.S. banks, our estimation results suggest that if Japanese banks decreased the share of strategic stockholdings to the same level as U.S. peers, the gap between the cost of equity capital in Japan and the U.S. could reduce to a certain extent.

Date: 2017-05-16
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