Bailout Stigma

Yeon-Koo Che, Chongwoo Choe and Keeyoung Rhee ()

Papers from arXiv.org

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.

Date: 2020-06, Revised 2023-10
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http://arxiv.org/pdf/2006.05640 Latest version (application/pdf)

Related works:
Working Paper: Bailout Stigma (2019)
Working Paper: Bailout Stigma (2015)
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