Why do banks issue equity?

LiangLiang He, Hui Li, Hong Liu, Tuyet Nhung Vu

Research output: Contribution to journalArticlepeer-review

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Abstract

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.
Original languageEnglish
Article number102256
JournalResearch in International Business and Finance
Volume69
Early online date1 Feb 2024
DOIs
Publication statusPublished - Apr 2024

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