Arbeitspapier
Why is equity capital expensive for opaque banks?
Bank managers often claim that equity is expensive relative to debt, which contradicts the Modigliani-Miller irrelevance theorem. This paper combines dividend signalling theories and the Diamond-Dybvig bank run model. An opaque bank must signal its solvency by paying high and stable dividends in order to keep depositors tranquil. This signalling may require costly liquidations if the return on assets has been poor, but not paying the dividend might cause panic and trigger a run on the bank. The more equity has been issued, the more liquidations are needed during bad times to pay the expected dividend to each share.
- ISBN
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978-952-462-787-0
- Language
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Englisch
- Bibliographic citation
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Series: Bank of Finland Research Discussion Papers ; No. 4/2012
- Classification
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Wirtschaft
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Payout Policy
Asymmetric and Private Information; Mechanism Design
- Subject
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Bank run
Capital adequacy
Signalling
Dividends
Irrelevance theorem
- Event
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Geistige Schöpfung
- (who)
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Kauko, Karlo
- Event
-
Veröffentlichung
- (who)
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Bank of Finland
- (where)
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Helsinki
- (when)
-
2012
- Handle
- Last update
-
10.03.2025, 11:46 AM CET
Data provider
This object is provided by:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Kauko, Karlo
- Bank of Finland
Time of origin
- 2012
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