The Cost of Capital for Banks: Evidence from Analyst Earnings Forecasts

95 Pages Posted: 16 Apr 2019 Last revised: 22 Oct 2021

See all articles by Jens Dick-Nielsen

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance

Jacob Gyntelberg

European Banking Authority; University of Copenhagen - Department of Economics

Christoffer Thimsen

Aarhus University - Department of Economics and Business Economics

Date Written: October 22, 2021

Abstract

We extract cost of capital measures for banks using analyst earnings forecasts, which we show are unbiased. We find that the cost of equity and the cost of debt decrease in the Tier 1 ratio, whereas total cost of capital is uncorrelated with the Tier 1 ratio. These findings suggest that investors adjust their return expectations for banks in accordance with the Modigliani-Miller (1958) conservation of risk principle. Hence, increased capital requirements are not made socially costly based on a notion that market pricing violates risk conservation. Equity can nevertheless still be privately costly for banks because of reduced subsidies.

Keywords: Bank funding; Cost of equity; Total cost of capital; Capital requirements; Government subsidies.

JEL Classification: G21, G28, L51

Suggested Citation

Dick-Nielsen, Jens and Gyntelberg, Jacob and Thimsen, Christoffer, The Cost of Capital for Banks: Evidence from Analyst Earnings Forecasts (October 22, 2021). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3360923 or http://dx.doi.org/10.2139/ssrn.3360923

Jens Dick-Nielsen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Jacob Gyntelberg

European Banking Authority ( email )

20 avenue André Prothin CS 30154
92927 Paris, La Défense CEDEX E14 5AA
France
675482748 (Phone)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5, Bygn 26
Copenhagen, 1353
Denmark

Christoffer Thimsen

Aarhus University - Department of Economics and Business Economics ( email )

Nordre Ringgade 1
Aarhus, 8000
Denmark

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