Bank capital and the cost of equity
Sami Ben Naceur,
Ralph Chami and
Journal of Financial Stability, 2021, vol. 53, issue C
Using a sample of publicly listed banks from 62 countries over the 1991–2017 period, we investigate the impact of capital on banks’ cost of equity. Consistent with the theoretical prediction that more equity in the capital mix leads to a fall in firms’ costs of equity, we find that better capitalized banks enjoy lower equity costs. Our baseline estimations indicate that a 1 percentage point increase in a bank’s equity-to-assets ratio lowers its cost of equity by about 18 basis points. Our results also suggest that the form of capital that investors value the most is sheer equity capital; other forms of capital, such as Tier 2 regulatory capital, are less (or not at all) valued by investors. Additionally, our main finding that capital has a negative effect on banks’ cost of equity holds in both developed and developing countries. The results of this paper provide the missing evidence in the debate on the effects of higher capital requirements on banks’ funding costs.
Keywords: Cost of equity; Bank capital; Banking regulation; Financial stability (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
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Working Paper: Bank Capital and the Cost of Equity (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:53:y:2021:i:c:s1572308921000024
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