| Summary: | Abstract The interrelationship between capitalization and profitability in banking sector of BRICS countries is studied with reference to existing five capital theories with the help of the ARDL and VECM/VAR models. These models are applied in the panel and individual settings on BRICS banking sector data from 2000 to 2020 to examine the presence of capital theories in the BRICS banking sectors. The study’s long-term empirical findings hold up the signalling and the bankruptcy cost hypothesis for the BRICS, Brazil, Russia, and India. Capitalization appears to be having a detrimental effect on profitability in China and South Africa, the agency argument is upheld. Profitability appears to have a considerable positive long-run influence on capitalization, which is consistent with Myers and Majluf’s (J Financ Econ 13:187–221, 1984) pecking order model for BRICS and Brazil. Profitability has a detrimental influence on capitalization in India and South Africa, corroborating the Modigliani and Miller (Am Econ Rev 48:261–297, 1958) and Miller (J Financ 32:1151–1168, 1977) notion. Although least significance is observed in most circumstances, the results of short-term prediction are comparable to those of long-run estimation. Both short-run and long-run evaluations of the capital-profitability link help in designing the “macroprudential” policies that demonstrate significance of our research.
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