Bailout Stigma

Yeon-Koo Che; Chongwoo Choe; Keeyoung Rhee

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arXiv · 2006.05640

Bailout Stigma

Yeon-Koo Che·Chongwoo Choe·Keeyoung Rhee

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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.

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Yeon-Koo Che, Chongwoo Choe, Keeyoung Rhee. 2020-06-10. Bailout Stigma. https://arxiv.org/abs/2006.05640

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