Capital structure and shareholder return

University of Birmingham
Birmingham Business School
BSc Accounting and Finance

Capital structure and shareholder return in Chinese banking industry

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(07 14856)

Extended Essay 2011-2012

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The length of the main body of the essay: 5,770 words

Index

Abstract
In June 2004, Basel II was published and it required banks to set up risk and capital management requirements so as to ensure adequate capital for the risks, to which the banks are exposed through the lending and investing activities.
In 2008 the Basel Committee on Banking Supervision issued the Basel III, which stressed bank capital requirements and introduced new regulatory requirements on bank liquidity and leverage.
As capital has been widely accepted as an effective tool for risk management in commercial banks, and foreign studies have provided enough evidence for the proposition that better capitalized banks would experience smaller declines during financial crisis. However, the existing researches in China only focus on the relationship between capital structure and financial performance, leaving studies of the relationship between capital structure and stock returns blank. As more and more commercial banks are entering the stock market, it has become more and more essential to examine whether capital structure would have an impact on stock returns or not. This essay tries to fill this blank and concludes that in China the minimum capital requirements are negatively associated with stock returns, and the stock returns are more sensitive to capital adequacy ratio.

Introduction
In 1988 the Basel Committee on Bank Supervision issued a set of minimum capital requirements for banks, which was known as the 1988 Basel Accord, or Basel I. In the following years, the financial conglomerate, financial innovation and risk management have developed into a higher level, the Basel I now widely viewed as outmoded. Then a more

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