Journal Article

Bank Capital and Value in the Cross-Section

Hamid Mehran and Anjan Thakor

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 24, issue 4, pages 1019-1067
Published in print April 2011 | ISSN: 0893-9454
Published online April 2011 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhq022
Bank Capital and Value in the Cross-Section

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  • Financial Regulation
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We develop a dynamic model of bank capital structure in an acquisitions context which predicts: (i) total bank value and the bank’s equity capital are positively correlated in the cross-section, and (ii) the various components of bank value are also positively cross-sectionally related to bank capital. Our empirical tests provide strong support for these predictions. The results are robust to a variety of alternative explanations—growth prospects, desire to acquire toe-hold positions, desire of capital-starved acquirers to buy capital-rich targets, market timing, pecking order, the effect of banks with binding capital requirements, Too Big To Fail, target profitability, risk, and mechanical effects.

Keywords: G21; G28; G32; G34

Journal Article.  24295 words.  Illustrated.

Subjects: Banking ; Financial Regulation ; Corporate Governance ; Mergers and Acquisitions

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