Using a multi-country panel of banks, the authors study whether better capitalized banks fared better in terms of stock returns during the financial crisis. They differentiate among various types of capital ratios: the Basel risk-adjusted ratio
the leverage ratio
the Tier I and Tier II ratios
and the common equity ratio. They find several results: (i) before the crisis, differences in capital did not affect subsequent stock returns
(ii) during the crisis, higher capital resulted in better stock performance, most markedly for larger banks and less well-capitalized banks
(iii) the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk-adjusted capital ratio
(iv) there is evidence that higher quality forms of capital, such as Tier 1 capital, were more relevant. They also examine the relationship between bank capitalization and credit default swap (CDS) spreads.