Title: Equity capital and bank profitability: evidence from the United Arab Emirates

Authors: Reza H. Chowdhury

Addresses: School of Business, University of Northern British Columbia, 3333 University Way, Prince George, B.C. V2N 4Z9, Canada

Abstract: The objective of this paper is to understand the effect of increasing equity capital in domestic banks of the United Arab Emirates (UAE). The paper also examines whether the relationship differs by bank size particularly at the time of financial crisis. We apply three different approaches including: 1) ordinary least squares; 2) fixed-effect regression; 3) system generalised method of moments to examine the research questions. The results exhibit that increasing equity capital improves bank profitability in the UAE, and thus high equity capital is a critical value-driver for UAE banks. The evidence also shows that the Dubai debt crisis had an insignificant effect on bank performance. We however do not find significant evidence that high equity capital of domestic banks is used as a buffer to absorb financial shock. This finding holds regardless of individual bank sizes.

Keywords: equity capital; bank profitability; financial crisis; domestic banks; United Arab Emirates; UAE; bank size; banking industry.

DOI: 10.1504/AAJFA.2015.067802

Afro-Asian Journal of Finance and Accounting, 2015 Vol.5 No.1, pp.1 - 20

Received: 20 Dec 2013
Accepted: 04 Sep 2014
Published online: 18 Mar 2015 *

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