Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/56201
Authors: 
Hortlund, Per
Year of Publication: 
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

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