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The bank capital requirement and information asymmetry

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  • 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
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    References listed on IDEAS

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    1. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    2. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
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    Keywords

    Bank capital ; Deposit insurance;

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