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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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    1. Black, Fischer & Miller, Merton H & Posner, Richard A, 1978. "An Approach to the Regulation of Bank Holding Companies," The Journal of Business, University of Chicago Press, vol. 51(3), pages 379-412, July.
    2. Matthieu Brun & Henri Fraisse & David Thesmar, 2013. "The Real Effects of Bank Capital Requirements," Working Papers hal-02011435, HAL.
    3. Gilles Chemla & Antoine Faure Grimaud, 1996. "Dynamic adverse selection and debt," Economics Working Papers 196, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 1996.
    4. DeAngelo, Harry & Stulz, Rene M., 2013. "Why High Leverage Is Optimal for Banks," Working Paper Series 2013-08, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    5. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
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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.

    More about this item

    Keywords

    Modigliani-Miller; banks; leverage; regulation;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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