Year: 2020
Type: preprint
Abstract: We develop a model of bailout stigma where accepting a bailout signals a firm's balance-sheet weakness and worsens its funding prospect. To avoid stigma, high-quality firms either withdraw from subsequent financing after receiving bailouts or refuse bailouts altogether to send a favorable signal. The former leads to a short-lived stimulation with a subsequent market freeze even worse than if there were no bailouts. The latter revives the funding market, albeit with delay, to the level achievable without any stigma, and implements a constrained optimal outcome. A menu of multiple bailout programs also compounds bailout stigma and worsens market freeze.
Source: arXiv (Cornell University)
Authors: Che, Yeon-Koo, Choe, Chongwoo, Rhee, Keeyoung
Institutions: Columbia University, Monash University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4286793326