Costs of Bank Equity Offerings in Response to Strengthened Capital Regulation

This paper investigates the determinants of new equity offerings and estimates its costs in sample selection model. The main finding is that a weak capital base is one of the key driving forces of the new issuance around the recently strengthened Basel regulations, although banks were not capital deficient relative to the current regulatory minimum. In sharp contrast to earlier studies, our empirical analysis provides supportive evidence for our penalty-aversion hypothesis. Bank equity offerings in response to strengthened regulations convey negative information on the future capital shortfall or associated costs of interventions. Furthermore, we find that the effect of new issues on the asset contraction is insignificant, supporting the penalty-aversion hypothesis