Bank Bailout Menus

Sudipto Bhattacharya and Kjell Nyborg

The Review of Corporate Finance Studies, 2013, vol. 2, issue 1, 29-61

Abstract: We study bailouts of banks that suffer from debt overhang problems and have private information about the quality of their assets-in-place and new investment opportunities. Menus of bailout plans are used as a screening device. Constrained optimality involves overcapitalization and nonlinear pricing, with worse types choosing larger bailouts. When investment opportunities follow the assets, we derive an equivalence result between equity injections and asset buyouts. The larger capital outlay under asset buyouts can be offset by borrowing against the assets. If investment opportunities follow the bank, equity injections offer more upside to the bailout agency. This may reduce or enhance efficiency, depending on whether screening intensity is needed mostly on assets-in-place or new investments.

JEL-codes: D82 G01 G28 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Bank bailout menus (2011)
Working Paper: Bank Bailout Menus (2011)
Working Paper: Bank Bailout Menus (2011)
Working Paper: Bank Bailout Menus (2010)
Working Paper: Bank Bailout Menus (2010)
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