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Sofiane Aboura and Emmanuel Lépinette
''Do banks satisfy the Modigliani-Miller theorem ?''
( 2015, Vol. 35 No.2 )
The capital structure of banks has become the focus of an extended debate among policy-makers, regulators and academics. The seminal Modigliani-Miller (1958) theorem is seen as supportive of regulators' drive to require higher equity capital to banks. This raises the question on to what extent does Modigliani-Miller theorem hold for banks. This article brings a new insight of the Modigliani-Miller theorem by considering the implicit government guarantee offered to banks. Our theorem shows that a bank does not satisfy the Modigliani-Miller theorem. The main result indicates that banks will favor leverage instead of equity.
Keywords: Modigliani-Miller, banks, leverage, regulation
JEL: G3 - Corporate Finance and Governance: General
Manuscript Received : Aug 02 2014 Manuscript Accepted : Apr 09 2015

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