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Do banks satisfy the Modigliani-Miller theorem?

Author

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  • Sofiane Aboura

    () (CEREG - Centre de Recherche sur la gestion et la Finance - DRM UMR 7088 - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres, DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

  • Emmanuel Lépinette

    () (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

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.
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Suggested Citation

  • Sofiane Aboura & Emmanuel Lépinette, 2015. "Do banks satisfy the Modigliani-Miller theorem?," Post-Print hal-01252895, HAL.
    • Handle: RePEc:hal:journl:hal-01252895
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01252895
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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. Chemla, G. & Faure-Grimaud, A., 1996. "Dynamic Adverse Selection and Debt," Papers 96.443, Toulouse - GREMAQ.
    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

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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