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

Christian Mücke, Loriana Pelizzon (), Vincenzo Pezone and Anjan Thakor ()

No 316, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We empirically examine the Capital Purchase Program (CPP) used by the US government 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 appoint 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.

Keywords: Bank Bailout; TARP; Capital Purchase Program; Dividend Payments; Board Appointments; Bank Recapitalization (search for similar items in EconPapers)
JEL-codes: G01 G2 G28 G38 H81 (search for similar items in EconPapers)
Date: 2021, Revised 2021
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-fdg
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: The Carrot and the Stick: Bank Bailouts and the Disciplining Role of Board Appointments (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:316

DOI: 10.2139/ssrn.3881871

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