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http://hdl.handle.net/10419/56201
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| Title: | | The long-term relationship between capital and earnings in banking  |
| Authors: | | Hortlund, Per |
| Issue Date: | | 2005 |
| Series/Report no.: | | SSE/EFI Working Paper Series in Economics and Finance 611 |
| Abstract: | | Contrary to received wisdom, some recent studies report a negative relationship between leverage and profitability in banking in the 1980s and early 1990s. This study presents new data on the leverage and profitability of Swedish commercial banks in 1870-2001, and explores the sign of the relationship in the long term. In the studied period, the capital-asset ratio decreased by a factor four, while return-on-equity more than doubled. The leverage formula postulates a positive linear relationship between return-on-equity and the debt-equity ratio. A strong positive linear relationship was found over the period 1871-1980, but not in 1980-2001. Thus, while supporting the results of the previous studies, a long-term normal positive relationship between leverage and profitability is also reaffirmed. |
| Subjects: | | Return-on-equity Leverage Bank capital |
| JEL: | | G21 N23 N24 |
| Document Type: | | Working Paper |
| Appears in Collections: | | SSE/EFI Working Paper Series in Economics and Finance, EFI - The Economic Research Institute, Stockholm School of Economics
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