Abstract
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.
| Original language | English |
|---|---|
| Pages (from-to) | 991-1008 |
| Number of pages | 18 |
| Journal | Journal of Business Finance and Accounting |
| Volume | 40 |
| Issue number | 7-8 |
| DOIs | |
| State | Published - Sep 2013 |
Keywords
- bank capital requirement; asset correlation; book-to-market equity; firm size; default probability
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Cite this
Lee, C-S., Lin, C-T., & Yu, M-T. (2013). Book-to-Market Equity, Asset Correlations and the Basel Capital Requirement. Journal of Business Finance and Accounting, 40(7-8), 991-1008. https://doi.org/10.1111/jbfa.12029