Empirical research has found that highly profitable firms face a lower cost of equity funding (for example, Hail and Leuz (2006)). This work has not looked at banks. In the third column of Table 1, we use earnings (defined as net income over equity) to proxy for future profitability. We find that high profitability compresses the market beta. In other words, more profitable banks tend to be less correlated with the market return, facing therefore a lower risk premium. This could reflect the extra buffer that higher profits afford to banks that would like to preserve stable cash distributions to.
