The Value Relevance of Regulatory Capital Components

48 Pages Posted: 20 Aug 2016 Last revised: 20 Jul 2018

See all articles by Martien Jan Peter Lubberink

Martien Jan Peter Lubberink

Victoria University of Wellington - School of Accounting and Commercial Law

Roger J. Willett

Victoria University of Wellington - Victoria Business School

Date Written: December 18, 2016

Abstract

We measure the value relevance of Tier 1 capital, regulatory adjustments, and Tier 2 capital of U.S. banks for the returns to common shareholders. Our research design relies on parsimonious log- linear regression models that mitigate shortcomings of conventional research designs. Results for the years 2001-2016 show that regulatory adjustments are weakly associated with market returns. The exceptions are positive adjustments, which are generally negatively correlated with market returns. More importantly, following the global financial crisis, the market response to changes in bank capital increases above its long-run norm of one. Departures from this norm are associated with excessive leverage. Response coefficients of measures of bank capitalization converge to one when the Tier 1 ratio increases to 12 percent.

Keywords: Banking, capital structure, multiplicative regression models, prudential filters, value relevance

JEL Classification: E58, G21, G32, M41

Suggested Citation

Lubberink, Martien Jan Peter and Willett, Roger J., The Value Relevance of Regulatory Capital Components (December 18, 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2826359 or http://dx.doi.org/10.2139/ssrn.2826359

Martien Jan Peter Lubberink (Contact Author)

Victoria University of Wellington - School of Accounting and Commercial Law ( email )

New Zealand
+64 4 463 5968 (Phone)

Roger J. Willett

Victoria University of Wellington - Victoria Business School ( email )

PO Box 600
Wellington 6140
New Zealand

Register to save articles to
your library

Register

Paper statistics

Downloads
89
Abstract Views
668
rank
282,149
PlumX Metrics