Does bank capitalization matter for bank stock returns?

Strategies to determine the determinants of financial performance of conventional and Islamic commercial banks: Evidence from Bangladesh

“…This lower status of capital adequacy is also responsible for increasing non- performing loans of banks (Barua & Barua, 2020). This result is similar to the findings of Clementina andIsu (2013) andHuang et al (2020).…”

The leverage anomaly in U.S. bank stock returns

“…This paper has been written simultaneously with two other papers, Bouwman et al (2018) and Huang et al (2020) who also look at the relationship between bank capital and stock performance. 3 The three papers start with the observation that the relationship between bank capital ratios and return is hump shaped and focus on the puzzle that low-capital banks do not give an extra return for the leverage risk.…”

“…3 The three papers start with the observation that the relationship between bank capital ratios and return is hump shaped and focus on the puzzle that low-capital banks do not give an extra return for the leverage risk. Both Bouwman et al (2018) and Huang et al (2020) show that the puzzle mainly stems from low-capital banks performing badly during recessions, arguing that the puzzle can be explained by a 'surprised investor channel' at the start of recessions. 4 The fact that low-capital stocks perform badly in recessions is not a puzzle in itself given that leverage mechanically increases returns on equity in good times and magnifies negative returns on equity in bad times (Modigliani and Miller, 1958).…”

“…There is a very recent strand of the literature focusing on the low risk-adjusted returns (alphas) for low-capital banks (Baker and Wurgler, 2015;Bouwman et al, 2018;Huang et al, 2020). This paper adds three major elements to the literature.…”

Handle with Care

“…Previous studies have shown that higher (lower) bank capital is beneficial (detrimental) for bank shareholders, particularly during crisis episodes(Berger and Bouwman 2013; Cappelletti and others 2020;and Huang, de Haan, and Scholtens 2020). This result is also consistent with a strand of literature showing that credit expansions predict bank equity crash risk(Baron and Xiong 2017;and Gandhi 2018).4 Based on the historical relationship between bankruptcies and unemployment in the United States,Greenwood, Iverson, and Thesmar (2020) show that the pace of business bankruptcy can be expected to increase by 140 percent relative to their 2019 level.©International Monetary Fund.…”