The carrot and the stick: bank bailouts and the disciplining role of board appointments

  • We empirically examine the Capital Purchase Program (CPP) used by the US gov- ernment to bail out distressed banks with equity infusions during the Great Recession. We find strong evidence that a feature of the CPP – the government’s ability to ap- point independent directors on the board of an assisted bank that missed six dividend payments to the Treasury – helped attenuate bailout-related moral hazard. Banks were averse to these appointments – the empirical distribution of missed payments exhibits a sharp discontinuity at five. Director appointments by the Treasury led to improved bank performance, lower CEO pay, and higher stock market valuations.

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Author:Christian Mücke, Loriana PelizzonORCiDGND, Vincenzo Pezone, Anjan V. Thakor
Parent Title (English):SAFE working paper ; No. 316
Series (Serial Number):SAFE working paper (316)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2021
Year of first Publication:2021
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2021/07/30
Tag:Bank Bailout; Bank Recapitalization; Board Appointments; Capital Purchase Program; Dividend Payments; TARP
Issue:6th July, 2021
Page Number:68
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht