Book-to-market equity, asset correlations and the basel capital requirement

• Autores: Shih-Cheng Lee, Chien-Ting Lin, Min-Teh Yu
• Localización: Journal of Business Finance & Accounting, ISSN-e 1468-5957, Vol. 40, Nº. 7 (Issue 7-8), 2013, págs. 991-1008
• Idioma: inglés
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• Resumen

  • This paper examines the effect of book-to-market equity (BE/ME) on asset correlations under the Basel capital requirement. We find that BE/ME captures variations in asset correlations after controlling for firm size, default probability and industry effects from 1987 to 2011. Obligors with higher BE/ME exhibit lower asset correlations compared to those with lower BE/ME. Decomposing BE/ME into assets-in-place and growth options based on the asset pricing literature shows that obligors with more assets-in-place or more fixed assets have higher BE/ME and lower asset correlations than those with more growth options. Overall, our findings suggest that BE/ME is an additional important factor that may improve the estimates of asset correlations and thereby banks� capital adequacy.