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Why do banks issue equity?

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posted on 2024-03-04, 16:31 authored by Liangliang He, Hui Li, Hong LiuHong Liu, Nhung VuNhung Vu

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.

History

School

  • Loughborough Business School

Published in

Research in International Business and Finance

Volume

69

Publisher

Elsevier BV

Version

  • VoR (Version of Record)

Rights holder

© The Authors

Publisher statement

This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/).

Acceptance date

2024-01-28

Publication date

2024-02-01

Copyright date

2024

ISSN

0275-5319

eISSN

1878-3384

Language

  • en

Depositor

Dr Nhung Vu. Deposit date: 1 March 2024

Article number

102256

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