Replication data for: Do Strict Capital Requirements Raise the Cost of Capital? Bank Regulation, Capital Structure, and the Low-Risk Anomaly

Principal Investigator(s): View help for Principal Investigator(s) Malcolm Baker; Jeffrey Wurgler

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P2015_1092_data			12/07/2019 12:50:PM
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Project Citation:

Baker, Malcolm, and Wurgler, Jeffrey. Replication data for: Do Strict Capital Requirements Raise the Cost of Capital? Bank Regulation, Capital Structure, and the Low-Risk Anomaly. Nashville, TN: American Economic Association [publisher], 2015. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2019-12-07. https://doi.org/10.3886/E116308V1

Project Description

Summary: Traditional capital structure theory predicts that reducing banks' leverage reduces the risk and cost of equity but does not change the weighted average cost of capital, and thus the rates for borrowers. We confirm that the equity of better-capitalized banks has lower beta and idiosyncratic risk. However, over the last 40 years, lower risk banks have not had lower costs of equity (lower stock returns), consistent with a stock market anomaly previously documented in other samples. A calibration suggests that a binding ten percentage point increase in Tier 1 capital to risk-weighted assets could double banks' risk premia over Treasury bills.

Scope of Project

JEL Classification:
      D25 Intertemporal Firm Choice: Investment, Capacity, and Financing
      G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
      G28 Financial Institutions and Services: Government Policy and Regulation
      G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
      L51 Economics of Regulation

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Published Versions

V1 [2019-12-07]

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