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Do banks satisfy the Modigliani-Miller theorem?

Author

Listed:
  • Sofiane Aboura

    (DRM-Finance, Paris-Dauphine University)

  • Emmanuel Lépinette

    (Ceremade, Paris-Dauphine University)

Abstract

The capital structure of banks has become the focus of an extended debate among policy-makers, regulators and academics. The seminal Modigliani-Miller (1958) theorem is seen as supportive of regulators' drive to require higher equity capital to banks. This raises the question on to what extent does Modigliani-Miller theorem hold for banks. This article brings a new insight of the Modigliani-Miller theorem by considering the implicit government guarantee offered to banks. Our theorem shows that a bank does not satisfy the Modigliani-Miller theorem. The main result indicates that banks will favor leverage instead of equity.

Suggested Citation

  • Sofiane Aboura & Emmanuel Lépinette, 2015. "Do banks satisfy the Modigliani-Miller theorem?," Economics Bulletin, AccessEcon, vol. 35(2), pages 924-935.
    • Handle: RePEc:ebl:ecbull:eb-14-00667
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    References listed on IDEAS

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    Cited by:

    1. Belinda Cheung & Sebastien Printant, 2019. "Australian Money Market Divergence: Arbitrage Opportunity or Illusion?," RBA Research Discussion Papers rdp2019-09, Reserve Bank of Australia.

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    More about this item

    Keywords

    Modigliani-Miller; banks; leverage; regulation;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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