I am grateful to Yoshinori Shimizu for exceptional guidance and great insights in writing this paper. I would also like to thank Eiji Ogawa, Masaru Konishi, Yukihiro Yasuda, Chung-Hua Shen, an anonymous referee, the Editor Ke Li, and seminar participants at Hitotsubashi University, JMES 2010 Spring Conference at Chuo University and IEFA 2010 Conference at National Taiwan University for helpful comments.
WHAT DRIVES THE TIME-SERIES AND CROSS-SECTIONAL VARIATIONS IN BANK CAPITAL RATIOS? EVIDENCE FROM JAPAN
Version of Record online: 22 NOV 2010
© 2010 The Author. Pacific Economic Review© 2010 Blackwell Publishing Asia Pty Ltd
Pacific Economic Review
Volume 15, Issue 5, pages 743–755, December 2010
How to Cite
Chen, S. (2010), WHAT DRIVES THE TIME-SERIES AND CROSS-SECTIONAL VARIATIONS IN BANK CAPITAL RATIOS? EVIDENCE FROM JAPAN. Pacific Economic Review, 15: 743–755. doi: 10.1111/j.1468-0106.2010.00529.x
- Issue online: 22 NOV 2010
- Version of Record online: 22 NOV 2010
This paper documents the time-series and cross-sectional variations in bank capital ratios and investigates their underlying driving forces using listed Japanese bank data from 1977 to 2009. We derive an overall framework in the form of a present-value model to decompose the variation in bank capital ratios into changes in expected future stock returns, profitability and leverage ratios. Moreover, we use the variance decomposition approach to examine the relative importance of these factors. We find that the expected future stock returns dominate the time-series variation in bank capital ratios, and that the expected future profitability also plays an important role as the expected stock returns in the cross-sectional variation.