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Testing the Modigliani and Miller Theory in Practice: Evidence from the Macedonian Banking System

Aneta Krstevska, Tome Nenovski () and Kristina Pogacnik Kostovska

Eastern European Economics, 2017, vol. 55, issue 3, 277-289

Abstract: Since the introduction of Basel III, bank capital requirements have been raised. The Modigliani and Miller (MM) theory indicates the irrelevance of the financing structure in terms of the cost of capital. This article tests the validity of the MM theory for the banking system in the Republic of Macedonia by applying panel estimation to analyze the linkage between banks’ calculated risk measure and leverage ratio. The main results find no evidence of the MM theory in this case, although the overall results are quite ambiguous, mainly because of specific characteristics of the Macedonian banking system.

Date: 2017
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DOI: 10.1080/00128775.2017.1294021

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Handle: RePEc:mes:eaeuec:v:55:y:2017:i:3:p:277-289