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Efficient Recapitalization

Thomas Philippon () and Philipp Schnabl

No 14929, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze government interventions to recapitalize a banking sector that restricts lending to firms because of debt overhang. We find that the efficient recapitalization program injects capital against preferred stock plus warrants and conditions implementation on sufficient bank participation. Preferred stock plus warrants reduces opportunistic participation by banks that do not require recapitalization, while conditional implementation limits free riding by banks that benefit from lower credit risk because of other banks' participation. Efficient recapitalization is profitable if the benefits of lower aggregate credit risk exceed the cost of implicit transfers to bank debt holders.

JEL-codes: G01 G2 G28 G33 G38 H0 H2 H81 (search for similar items in EconPapers)
Date: 2009-04
Note: AP CF EFG LE ME PE
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Published as Thomas Philippon & Philipp Schnabl, 2013. "Efficient Recapitalization," Journal of Finance, American Finance Association, vol. 68(1), pages 1-42, 02.

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