179 Pages Posted: 29 Feb 2012
Date Written: 2011
The imposition of risk-based capital requirements has been advocated by many regulatory authorities as a means of mitigating the excessive risk-taking by financial institutions. However, their imposition also constitutes a requirement to maintain an exogenously influenced capital structure, which may adversely affect the values of the firms involved.
This research paper examines the wealth effects of the Basel Committee announcements regarding Basel III.
The main hypothesis to be tested is whether the new requirements will adversely affect banks by forcing a sub-optimal capital structure (since shareholders might prefer a higher degree of financial leverage).
The alternative hypothesis implies that the market believes the new requirements will benefit banks by reducing risk, hence improving the stability of the financial sector in the future.
Keywords: Basel, Committee, announcements, event-study, event-date clustering
JEL Classification: G28
Suggested Citation: Suggested Citation