Do Banks Satisfy the Modigliani-Miller Theorem ?

13 Pages Posted: 2 Nov 2013 Last revised: 21 Jun 2015

See all articles by Sofiane Aboura

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management

Emmanuel Lepinette

Université Paris-Dauphine - CEREMADE, CNRS

Date Written: November 1, 2013

Abstract

The capital structure of banks has become the focus of an extended debate among policymakers, regulators and academics. The seminal Modigliani-Miller (1958) theorem is seen as supportive of regulators' drive to require higher equity capital to banks. This raises the question on to what extent does Modigliani-Miller theorem hold for banks. This article brings a new insight of the Modigliani-Miller theorem by considering the implicit government guarantee offered to banks. Our theorem shows that a bank does not satisfy the Modigliani-Miller theorem. The main result indicates that banks will favor leverage instead of equity.

Keywords: Modigliani-Miller, banks, leverage, regulation

JEL Classification: G3, G21, G28

Suggested Citation

Aboura, Sofiane and Lepinette, Emmanuel, Do Banks Satisfy the Modigliani-Miller Theorem ? (November 1, 2013). Available at SSRN: https://ssrn.com/abstract=2348608 or http://dx.doi.org/10.2139/ssrn.2348608

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management ( email )

99 avenue Jean-Baptiste
Clément, Villetaneuse 93430
France

Emmanuel Lepinette (Contact Author)

Université Paris-Dauphine - CEREMADE, CNRS ( email )

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France

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