Bank Capital and the Cost of Equity

By Mohamed Belkhir, Sami Ben Naceur, Ralph Chami, Anis Semet

December 4, 2019

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Mohamed Belkhir, Sami Ben Naceur, Ralph Chami, and Anis Semet. Bank Capital and the Cost of Equity, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Banking, Capital adequacy requirements, Financial institutions, Financial markets, Financial regulation and supervision, Loan loss provisions, National accounts, Return on investment, Stock markets, Stocks

Keywords: Bank capital, Bank capital measure, Bank capitalization, Bank cost, Banking regulation, Capital adequacy requirements, Capital measure, Capital requirement, Capitalized bank, Cost of equity, Financial leverage decrease, Financial risk, Financial stability, Funding cost, Global, Loan loss provisions, Return on equity, Return on investment, Risk profile, Stock markets, Stocks, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/265
Stock No:

WPIEA2019265
ISBN:

9781513519807
ISSN:

1018-5941

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