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Regulatory changes and the cost of equity:evidence from French banks

Olivier de Bandt (), Boubacar Camara, P. Pessarossi and Martin Rose ()

Débats économiques et financiers from Banque de France

Abstract: In the paper, we first investigate the impact of an increase in capital requirements on the equity risk (beta) of listed banks in France. We find that an increase in capital ratios reduces banks’ systematic risk. This leads to a decrease in shareholders’ required return on equity, providing evidence in favour of the Modigliani-Miller theorem: the greater cost of capital due to higher capital ratios appears to be mitigated by the decrease in shareholders’ expected return on equity. We then analyze the impact of liquidity position and find almost no evidence so far that investors take banks’ liquidity risk into account.

Keywords: Modigliani-Miller; cost of equity; solvency ratios; liquidity ratios. (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2014
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:decfin:11

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