Impact of Government Bailout on Banks’ Cost of Equity: Additional Evidence from the Financial Bailout of 2008–2009

Daphne Wang (), Robert Houmes (), Thanh Ngo () and Omar Esqueda
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Robert Houmes: Davis College of Business, Jacksonville University, Jacksonville, FL 32211, USA
Thanh Ngo: College of Business, East Carolina University, Greenville, NC 27858, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2021, vol. 24, issue 01, 1-41

Abstract: The Capital Purchase Program (CPP) was the first and most significant program under the Troubled Asset Relief Program (TARP) during 2008–2009 financial crisis. This study evaluates the effect of the CPP during this period on the cost of equity of 170 publicly listed banks in the United States that received funding. To control for the potential effects of endogeneity on our results, we use a propensity score matched sample of non-CPP banks. Using this approach, we document robust evidence that the liquidity provided by the government bailout reduced the cost of equity for recipient banks, especially for those banks that repaid their bailout funds in full. This decrease in the cost of equity is particularly significant for banks with high market-to-book ratios, low concentrations of institutional ownership, and those banks with at least one large blockholder. Our findings have important implications for the assessment of government bailout programs and the future regulation of financial institutions.

Keywords: Bank; Capital Purchase Program (CPP); Cost of Equity (COE); Financial Bailout; Troubled Asset Relief Program (TARP) (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S021909152150003X

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