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Do banks satisfy the Modigliani-Miller theorem?

Sofiane Aboura () and Emmanuel Lépinette ()
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Emmanuel Lépinette: Ceremade, Paris-Dauphine University

Authors registered in the RePEc Author Service: Emmanuel Lépinette

Economics Bulletin, 2015, vol. 35, issue 2, 924-935

Abstract: The capital structure of banks has become the focus of an extended debate among policy-makers, regulators and academics. The seminal Modigliani-Miller (1958) theorem is seen as supportive of regulators' drive to require higher equity capital to banks. This raises the question on to what extent does Modigliani-Miller theorem hold for banks. This article brings a new insight of the Modigliani-Miller theorem by considering the implicit government guarantee offered to banks. Our theorem shows that a bank does not satisfy the Modigliani-Miller theorem. The main result indicates that banks will favor leverage instead of equity.

Keywords: Modigliani-Miller; banks; leverage; regulation (search for similar items in EconPapers)
JEL-codes: G3 (search for similar items in EconPapers)
Date: 2015-04-09
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