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Why do banks issue equity?

Author

Listed:
  • He, Liangliang
  • Li, Hui
  • Liu, Hong
  • Vu, Tuyet Nhung

Abstract

US banks maintain significantly higher capital levels than required by regulatory authorities. In addition to complying with capital regulations, this paper investigates the motivations behind banks' decisions to issue equity. We find that banks use seasoned equity offerings (SEOs) to expand their assets. Our findings indicate that banks conducting SEOs experience not only an increase in their capital ratios but also in deposits and assets in the years following the SEO, compared to the other banks. The newly raised funds are primarily invested in for-sale loans and other loans. There is an overall increase in risk and a decrease in market-to-book value during the post-SEO period. Our results are not driven by changes in deposit supply before or after the bank's SEO and remain robust when tested with alternative placebo-matched samples. Taken together, our findings suggest that banks engage in risk-taking behaviors, and highlight the importance of regulating the size of banks.

Suggested Citation

  • He, Liangliang & Li, Hui & Liu, Hong & Vu, Tuyet Nhung, 2024. "Why do banks issue equity?," Research in International Business and Finance, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:riibaf:v:69:y:2024:i:c:s0275531924000485
    DOI: 10.1016/j.ribaf.2024.102256
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    More about this item

    Keywords

    Seasoned equity offering (SEO); Capital ratios; Asset expansion; Bank risk-taking; Bank performance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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