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Testing the Modigliani and Miller Theory in Practice: Evidence from the Macedonian Banking System

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  • Aneta Krstevska
  • Tome Nenovski
  • Kristina Pogacnik Kostovska

Abstract

Since the introduction of Basel III, bank capital requirements have been raised. The Modigliani and Miller (MM) theory indicates the irrelevance of the financing structure in terms of the cost of capital. This article tests the validity of the MM theory for the banking system in the Republic of Macedonia by applying panel estimation to analyze the linkage between banks’ calculated risk measure and leverage ratio. The main results find no evidence of the MM theory in this case, although the overall results are quite ambiguous, mainly because of specific characteristics of the Macedonian banking system.

Suggested Citation

  • Aneta Krstevska & Tome Nenovski & Kristina Pogacnik Kostovska, 2017. "Testing the Modigliani and Miller Theory in Practice: Evidence from the Macedonian Banking System," Eastern European Economics, Taylor & Francis Journals, vol. 55(3), pages 277-289, May.
    • Handle: RePEc:mes:eaeuec:v:55:y:2017:i:3:p:277-289
    DOI: 10.1080/00128775.2017.1294021
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    1. Anat R. Admati & Peter M. DeMarzo & Martin F. Hellwig & Paul Pfleiderer, 2010. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2010_42, Max Planck Institute for Research on Collective Goods.
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    Cited by:

    1. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.
    2. Hossain, Mohammed Sawkat, 2021. "A revisit of capital structure puzzle: Global evidence and analysis," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 657-678.

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