The Value Relevance of Regulatory Capital Components
48 Pages Posted: 20 Aug 2016 Last revised: 20 Jul 2018
Date Written: December 18, 2016
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
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