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What Drives The Time‐Series And Cross‐Sectional Variations In Bank Capital Ratios? Evidence From Japan

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  • Sichong Chen

Abstract

This paper documents the time-series and cross‐sectional variations in bank capital ratios and investigates their underlying driving forces using listed Japanese bank data from 1977 to 2009. We derive an overall framework in the form of a present‐value model to decompose the variation in bank capital ratios into changes in expected future stock returns, profitability and leverage ratios. Moreover, we use the variance decomposition approach to examine the relative importance of these factors. We find that the expected future stock returns dominate the time‐series variation in bank capital ratios, and that the expected future profitability also plays an important role as the expected stock returns in the cross‐sectional variation.

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  • Sichong Chen, 2010. "What Drives The Time‐Series And Cross‐Sectional Variations In Bank Capital Ratios? Evidence From Japan," Pacific Economic Review, Wiley Blackwell, vol. 15(5), pages 743-755, December.
    • Handle: RePEc:bla:pacecr:v:15:y:2010:i:5:p:743-755
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    File URL: http://hdl.handle.net/10.1111/j.1468-0106.2010.00529.x
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    References listed on IDEAS

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    1. Tuomo Vuolteenaho, 2002. "What Drives Firm‐Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, February.
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    4. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
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    9. Fama, Eugene F. & French, Kenneth R., 2006. "Profitability, investment and average returns," Journal of Financial Economics, Elsevier, vol. 82(3), pages 491-518, December.
    10. Chen, Sichong, 2011. "Capital ratios and the cross-section of bank stock returns: Evidence from Japan," Journal of Asian Economics, Elsevier, vol. 22(2), pages 99-114, April.
    11. Shimizu, Yoshinori, 2007. "Impacts of the BIS regulation on the Japanese economy," Journal of Asian Economics, Elsevier, vol. 18(1), pages 42-62, February.
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    Cited by:

    1. Chen, Sichong, 2013. "How do leverage ratios affect bank share performance during financial crises: The Japanese experience of the late 1990s," Journal of the Japanese and International Economies, Elsevier, vol. 30(C), pages 1-18.
    2. Chen, Sichong, 2011. "Capital ratios and the cross-section of bank stock returns: Evidence from Japan," Journal of Asian Economics, Elsevier, vol. 22(2), pages 99-114, April.

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