EMNES Working Paper 44 - Bank Capital and the Cost of Equity

16-10-2020
EMNES Working Paper 44 - Bank Capital and the Cost of Equity
EMNES Working Paper 44 - Bank Capital and the Cost of Equity

Using a sample of publicly listed banks from 62 developed and developing, including MENA, countries over the 1991-2017 period, the authors 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, it was found that better capitalised banks enjoy lower equity costs.

The results also suggest that the form of capital that investors value the most is sheer equity capital; Additionally, the 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.