Topic: The Cost of Capital for Banks

Speaker: Jens Dick-Nielsen, Associate Professor of Finance, Copenhagen Business School

Date: November 20, 2019 (Wednesday)

Time: 10:00am-11:30am

Location: 4-101, Building 4

Language: English

Abstract:

We use analyst earnings forecasts to extract cost of capital measures for banks. Both the cost of equity and debt capital are decreasing in the tier 1 ratio, whereas total cost of capital is independent of the tier 1 ratio. Our findings suggest that investors adjust their expectations in accordance with the con-servation of risk principle (Modigliani and Miller, 1958), also around observed instances of equity issuance by banks. Extrapolating from our results; a 10 pp increase in the tier 1 ratio is associated with a 2-8 bps increase in customer borrowing rates due to a loss of tax shield. Finally, we find that off-balance sheet exposures and demand deposits lower total cost of capital.

About the speaker:

Jens Dick-Nielsen is Associate Professor of Finance at Department of Finance, Copenhagen Business School, and Center for Financial Frictions (FRIC). He is a member of the Danish Finance Institute. He holds a M.Sc. in Mathematical Business Economics from Copenhagen Business School and a PhD in Finance from Department of Finance, Copenhagen Business School. He has been a visiting Ph.D. scholar at NYU Stern school of Business. His main research area is credit risk and liquidity risk and his work has appeared in Review of Financial Studies, Journal of Financial Economics, and Journal of Fixed Income and others.