Application of Modigliani-Miller theorem to banking sector
Résumé
This study investigates the possible impact of increased capital requirements on banks cost of capital for the largest banks from US, UK and Euro area. It quantifies the impact of leverage on cost of equity and weighted average cost of capital and compare them between countries. The research question of interest is to what extent the Modigliani-Miller (MM) capital irrelevance theorem can be applied to banks and if there are any differences in level of MM effect for the same industry across countries.
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