The Relationship between Capital Adequacy Ratio and Stock Price of Banking Institutions: Evidence from Malaysia

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Tan Jia Jheng,Ahmed Razman Abdul Latiff,Ooi Chee Keong and Tong Chue Qun

Abstract

This study is carried out in order to examine the relationship between capital adequacy stock price of Malaysia banking institution. It was in responses to the decision made by the Malaysia Central Bank, Bank Negara Malaysia (BNM) that required every bank in Malaysia to implement the latest international banking regulation — Basel Ill. In order to further understand that relationship deeper, this study employed linear regression analysis to examine the relationship between capital adequacy ratio and stock price of Malaysia banks. The data was derived from 8 local licensed commercial banks from 2005 to 2014. The findings showed that the capital adequacy ratio has no impact on the bank's stock price. It was different from the finding of positive influence of financial distress on the bank's stock price. Nevertheless, these findings were important as it evidenced that the new banking regulation is insufficient to help address financial distress of bank and public confidence in Malaysia.

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