IDEAS home Printed from https://ideas.repec.org/p/fip/fedlwp/1994-005.html
   My bibliography  Save this paper

The bank capital requirement and information asymmetry

Author

Listed:
  • Sangkyun Park

Abstract

This paper recognizes two main factors that cause the capital requirement to affect the weighted average cost of capital and hence the investment behavior of banks: underpriced debt resulting from the deposit insurance and information asymmetry between managers and the stock market. For a bank enjoying a low cost of debt (deposits), an increased proportion of equity financing raises the weighted average cost ofcapital. When the stock market underestimates the value of a bank due to information asymmetry, equity financing is expensive. This paper finds that banks constrained by the tightened capital requirement grew slower in 1991 and that information asymmetry as well as underpriced deposits played a role in explaining the slower growth.

Suggested Citation

  • Sangkyun Park, 1994. "The bank capital requirement and information asymmetry," Working Papers 1994-005, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:1994-005
    as

    Download full text from publisher

    File URL: http://research.stlouisfed.org/wp/more/1994-005/
    Download Restriction: no

    File URL: http://research.stlouisfed.org/wp/1994/94-005.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robert A. Korajczyk & Deborah Lucas & Robert L. McDonald, 1990. "Understanding Stock Price Behavior around the Time of Equity Issues," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 257-278, National Bureau of Economic Research, Inc.
    2. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. Jeffrey K. MacKie-Mason, 1990. "Do Firms Care Who Provides Their Financing?," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 63-104, National Bureau of Economic Research, Inc.
    5. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    6. Michael Devereux & Fabio Schiantarelli, 1990. "Investment, Financial Factors, and Cash Flow: Evidence from U.K. Panel Data," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 279-306, National Bureau of Economic Research, Inc.
    7. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    8. Rubinstein, Mark E, 1973. "A Mean-Variance Synthesis of Corporate Financial Theory," Journal of Finance, American Finance Association, vol. 28(1), pages 167-181, March.
    9. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Enrique Giner & Vicente Salas Fumás, 1995. "Explicaciones alternativas para la política de dividendos: análisis empírico con datos empresariales españoles," Investigaciones Economicas, Fundación SEPI, vol. 19(3), pages 329-348, September.
    2. Anne Gron & Deborah J. Lucas, 1998. "External Financing and Insurance Cycles," NBER Chapters, in: The Economics of Property-Casualty Insurance, pages 5-28, National Bureau of Economic Research, Inc.
    3. Herrendorf, Berthold & Valentinyi, Akos & Waldmann, Robert, 1998. "Ruling out Indeterminacy: the Role of Heterogeneity," CEPR Discussion Papers 1858, C.E.P.R. Discussion Papers.
    4. Gaurav Gupta & Jitendra Mahakud, 2019. "Alternative measure of financial development and investment-cash flow sensitivity: evidence from an emerging economy," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-28, December.
    5. Martin Kukuk & Manfred Stadler, 2001. "Financing Constraints and the Timing of Innovations in the German Services Sector," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 28(3), pages 277-292, September.
    6. Thakor, Anjan V., 1993. "Information, Investment Horizon, and Price Reactions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(4), pages 459-482, December.
    7. Holderness, Clifford G., 2018. "Equity issuances and agency costs: The telling story of shareholder approval around the world," Journal of Financial Economics, Elsevier, vol. 129(3), pages 415-439.
    8. Charles W. Calomiris, 1993. "Financial Factors in the Great Depression," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 61-85, Spring.
    9. Hovakimian, Gayane & Titman, Sheridan, 2006. "Corporate Investment with Financial Constraints: Sensitivity of Investment to Funds from Voluntary Asset Sales," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 357-374, March.
    10. Korajczyk, Robert A. & Levy, Amnon, 2003. "Capital structure choice: macroeconomic conditions and financial constraints," Journal of Financial Economics, Elsevier, vol. 68(1), pages 75-109, April.
    11. Cuong Nguyen, 2019. "The asymmetry in firms’ mechanisms of cash holdings adjustments: evidence from the G-5 economies," Review of Quantitative Finance and Accounting, Springer, vol. 53(2), pages 429-463, August.
    12. Pratap, Sangeeta, 2003. "Do adjustment costs explain investment-cash flow insensitivity?," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 1993-2006, September.
    13. Hermes, Niels & Lensink, Robert, 1996. "Financial reform and information problems in capital markets: an empirical analysis of the Chilean experience, 1983-1992," Research Report 96C37, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    14. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    15. Ulph, A., 1994. "Strategic environmental policy, international trade and the single European market (forthcoming in environmental policy with economic and political integration, Edward Elgar)," Discussion Paper Series In Economics And Econometrics 9403, Economics Division, School of Social Sciences, University of Southampton.
    16. Anil K. Kashyap & Jeremy C. Stein, 1994. "Monetary Policy and Bank Lending," NBER Chapters, in: Monetary Policy, pages 221-261, National Bureau of Economic Research, Inc.
    17. Haramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1996. "Capital market imperfections before and after financial liberalization: An Euler equation approach to panel data for Ecuadorian firms," Journal of Development Economics, Elsevier, vol. 51(2), pages 367-386, December.
    18. Oksanen, Olli-Pekka, 2006. "Are Foreign Investments Replacing Domestic Investments? - Evidence from Finnish Manufacturing," Discussion Papers 1001, The Research Institute of the Finnish Economy.
    19. Roger H. Gordon & Jeffrey K. MacKie-Mason, 1990. "Effects of the Tax Reform Act of 1986 on Corporate Financial Policy and Organizational Form," NBER Working Papers 3222, National Bureau of Economic Research, Inc.
    20. Blackburn, K. & Hung, V.T.Y., 1993. "A theory of growth, financial development and trade," Discussion Paper Series In Economics And Econometrics 9303, Economics Division, School of Social Sciences, University of Southampton.

    More about this item

    Keywords

    Bank capital; Deposit insurance;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:1994-005. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anna Oates (email available below). General contact details of provider: https://edirc.repec.org/data/frbslus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.