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Does Opaqueness Make Equity Capital Expensive for Banks?

Karlo Kauko

Revista de Economía del Rosario, 2016, vol. 17, issue 2, 203-227

Abstract: Bank managers often claim that equity is expensive, which contradicts the Modigliani-Miller irrelevance theorem. An opaque bank must signal its solvency by paying high and stable dividens in order to keep depositors tranquil. This signalling may require costly liquidations if the return on assets has been poor, but not paying the dividend might trigger a run. A strongly capitalised bank should keep substantial amounts of risk-free yet non-productive currency because the number of shares is high, which is costly. The dividend is informative of the state of the bank; rational depositors react to it.

Keywords: dividends; bank capital; irrelevance theorem (search for similar items in EconPapers)
JEL-codes: G21 G35 D82 (search for similar items in EconPapers)
Date: 2016
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