Why do banks issue equity?
Liangliang He,
Hui Li,
Hong Liu and
Tuyet Nhung Vu
Research in International Business and Finance, 2024, vol. 69, issue C
Abstract:
US banks maintain significantly higher capital levels than required by regulatory authorities. In addition to complying with capital regulations, this paper investigates the motivations behind banks' decisions to issue equity. We find that banks use seasoned equity offerings (SEOs) to expand their assets. Our findings indicate that banks conducting SEOs experience not only an increase in their capital ratios but also in deposits and assets in the years following the SEO, compared to the other banks. The newly raised funds are primarily invested in for-sale loans and other loans. There is an overall increase in risk and a decrease in market-to-book value during the post-SEO period. Our results are not driven by changes in deposit supply before or after the bank's SEO and remain robust when tested with alternative placebo-matched samples. Taken together, our findings suggest that banks engage in risk-taking behaviors, and highlight the importance of regulating the size of banks.
Keywords: Seasoned equity offering (SEO); Capital ratios; Asset expansion; Bank risk-taking; Bank performance (search for similar items in EconPapers)
JEL-codes: G21 G32 L25 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:69:y:2024:i:c:s0275531924000485
DOI: 10.1016/j.ribaf.2024.102256
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