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Capitalization and profitability: applicability of capital theories in BRICS banking sector

Author

Listed:
  • Nikita Singhal

    (IIMT University)

  • Shikha Goyal

    (Amity University)

  • Divya Sharma

    (Indian Council for Social Science Research)

  • Sapna Kumari

    (Vidya Knowledge Park)

  • Shweta Nagar

    (GL Bajaj Institute of Technology & Management)

Abstract

The interrelationship between capitalization and profitability in banking sector of BRICS countries is studied with reference to existing five capital theories with the help of the ARDL and VECM/VAR models. These models are applied in the panel and individual settings on BRICS banking sector data from 2000 to 2020 to examine the presence of capital theories in the BRICS banking sectors. The study’s long-term empirical findings hold up the signalling and the bankruptcy cost hypothesis for the BRICS, Brazil, Russia, and India. Capitalization appears to be having a detrimental effect on profitability in China and South Africa, the agency argument is upheld. Profitability appears to have a considerable positive long-run influence on capitalization, which is consistent with Myers and Majluf’s (J Financ Econ 13:187–221, 1984) pecking order model for BRICS and Brazil. Profitability has a detrimental influence on capitalization in India and South Africa, corroborating the Modigliani and Miller (Am Econ Rev 48:261–297, 1958) and Miller (J Financ 32:1151–1168, 1977) notion. Although least significance is observed in most circumstances, the results of short-term prediction are comparable to those of long-run estimation. Both short-run and long-run evaluations of the capital-profitability link help in designing the “macroprudential” policies that demonstrate significance of our research.

Suggested Citation

  • Nikita Singhal & Shikha Goyal & Divya Sharma & Sapna Kumari & Shweta Nagar, 2022. "Capitalization and profitability: applicability of capital theories in BRICS banking sector," Future Business Journal, Springer, vol. 8(1), pages 1-13, December.
    • Handle: RePEc:spr:futbus:v:8:y:2022:i:1:d:10.1186_s43093-022-00140-w
    DOI: 10.1186/s43093-022-00140-w
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    1. Peter Brusov & Tatiana Filatova & Natali Orekhova, 2023. "Generalization of the Brusov–Filatova–Orekhova Theory for the Case of Variable Income," Springer Books, in: The Brusov–Filatova–Orekhova Theory of Capital Structure, chapter 0, pages 265-290, Springer.
    2. Reis Castigo Intupo, 2023. "Development of a Bankruptcy Prediction Model for the Banking Sector in Mozambique Using Linear Discriminant Analysis," Papers 2311.16705, arXiv.org.
    3. Reis Castigo Intupo, 2023. "Development of a Bankruptcy Prediction Model for the Banking Sector in Mozambique Using Linear Discriminant Analysis," Applied Economics and Finance, Redfame publishing, vol. 10(4), pages 26-40, November.
    4. Shikha Goyal & Nikita Singhal & Nandita Mishra & Subhash Kumar Verma, 2023. "The impact of macroeconomic and institutional environment on NPL of developing and developed countries," Future Business Journal, Springer, vol. 9(1), pages 1-15, December.
    5. Richard Kajumbula & Patricia Lindelwa Makoni, 2024. "Cointegration between CEO Power and Bank Risk: the Case of Commercial Banks in Uganda," Economic Research Guardian, Mutascu Publishing, vol. 14(2), pages 127-150, December.

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    More about this item

    Keywords

    Capital theories; BRICS; Profitability; Banking; ARDL estimation; VECM models;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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