Bank Capital and the Cost of Equity

45 Pages Posted: 23 Jan 2020

See all articles by Mohamed Belkhir

Mohamed Belkhir

UAE University

Sami Ben Naceur

International Monetary Fund (IMF)

Ralph Chami

International Monetary Fund (IMF)

Anis Samet

American University of Sharjah - School of Business and Management

Multiple version iconThere are 2 versions of this paper

Date Written: December 2019

Abstract

Using a sample of publicly listed banks from 62 countries over the 1991-2017 period, we investigate the impact of capital on banks' cost of equity. Consistent with the theoretical prediction that more equity in the capital mix leads to a fall in firms' costs of equity, we find that better capitalized banks enjoy lower equity costs. Our baseline estimations indicate that a 1 percentage point increase in a bank's equity-to-assets ratio lowers its cost of equity by about 18 basis points. Our results also suggest that the form of capital that investors value the most is sheer equity capital; other forms of capital, such as Tier 2 regulatory capital, are less (or not at all) valued by investors. Additionally, our main finding that capital has a negative effect on banks' cost of equity holds in both developed and developing countries. The results of this paper provide the missing evidence in the debate on the effects of higher capital requirements on banks' funding costs.

Keywords: Financial statistics, Financial crises, Bank capital, Stock markets, Capital regulation, Cost of equity, Banking regulation, Financial stability, WP, Coe, country-level, ROA, equity

JEL Classification: G21, G28, E01, K2, C, M41

Suggested Citation

Belkhir, Mohamed and Ben Naceur, Sami and Chami, Ralph and Samet, Anis, Bank Capital and the Cost of Equity (December 2019). IMF Working Paper No. 19/265. Available at SSRN: https://ssrn.com/abstract=3524300

Mohamed Belkhir (Contact Author)

UAE University ( email )

College of Business and Economics
P.O.Box 17555
Al Ain, 17555
United Arab Emirates

Sami Ben Naceur

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ralph Chami

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6039 (Phone)
202-623-6068 (Fax)

Anis Samet

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

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