Bank Leverage and Profitability: Evidence from a Sample of International Banks
Posted: 29 Nov 2015 Last revised: 9 Dec 2015
Date Written: November 28, 2015
We examine the relationship between leverage and residual income for a sample of international banks using an unbalanced panel over the period 2005-2011. Our GMM-based econometric model considers both bank-level and country-level variables to control for several other factors aside from equity capital and allows for endogeneity and unobservable heterogeneity. We document a significant positive non-monotonic link between the capital ratio and residual income for the international banking industry. These results are robust to a number of different model specifications.
Keywords: Implied cost of capital; residual income capital structure; Dynamic system GMM; Banking Industry
JEL Classification: G18; G21; C23
Suggested Citation: Suggested Citation