Is Equity Expensive?

The banker sitting next to me was lamenting the profitable lending opportunities being passed up by capital constrained banks, when I broke in to ask: “Then, why don’t they raise more capital?” . . . “They can’t,” he said. “It’s too expensive. Their stock is selling for only 50 percent of book value.” “Book values have nothing to do with the cost of equity capital,” I replied. “That’s just the market’s way of saying: We gave those guys a dollar and they managed to turn it into 50 cents.”

Merton Miller, 1990 Nobel Laureate

THE CONVERSATION REPORTED by Merton Miller and quoted above focuses on a key question for banking regulation.1 To bankers it seems obvious that equity is expensive.2 But what does this statement refer ...

Get The Bankers' New Clothes now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.