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Bank Capital and the Cost of Equity
Author:
Mohamed Belkhir null

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Samy Ben Naceur
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Mr. Ralph Chami
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Anis Semet null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 265
Language:
English
Publication Date:
04 Dec 2019
DOI:
https://doi.org/10.5089/9781513519807.001
ISBN:
9781513519807
ISSN:
1018-5941
Pages:
44
Keywords:
WP; bank capital; capital requirement; financial risk; capital measure; Cost of equity; Banking regulation; Financial stability; return on equity; bank capitalization; bank cost; capitalized bank; bank capital measure; funding cost; financial leverage decrease; risk profile; Stocks; Capital adequacy requirements; Stock markets; Return on investment; Loan loss provisions; Global
Legal-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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund