Opaque bank assets and optimal equity capital

Min Dai, Shan Huang, Jussi Keppo

Research output: Journal article publicationJournal articleAcademic researchpeer-review

5 Citations (Scopus)


Banks’ assets are opaque, and therefore, we model their true accounting asset values as partially observed variables. We derive a stochastic control model to optimize banks’ dividend and recapitalization policies in this situation, and calibrate that to a sample of U.S. banks. By the calibrated model, the noise in reported accounting asset values hides about one-third of the true asset return volatility and raises the banks’ market equity value by 7.8%. Particularly, those banks with a high level of loan loss provisions, nonperforming assets, and real estate loans, and with a low volatility of reported total assets have noisy accounting asset values. Because of the substantial shock on the true asset values, the banks’ assets were more opaque during the recent financial crisis.

Original languageEnglish
Pages (from-to)369-394
Number of pages26
JournalJournal of Economic Dynamics and Control
Publication statusPublished - Mar 2019


  • Bank capital
  • Banking regulation
  • Dividends
  • Earnings smoothing
  • Investment

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics


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