Bailout Stigma

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, a firm with high-quality legacy assets either withdraws from subsequent financing after receiving a bailout or refuses a bailout altogether to send a favorable signal. The former leads to a short-lived stimulation with subsequent market freeze even worse than if there were no bailout. The latter revives the funding market, albeit with delay, to the level achievable without any stigma. Strikingly, a bailout offer is most effective when many firms reject it (to build a favorable reputation) rather than accept it.

Can Discount Window Stigma Be Cured? An Experimental Investigation

“…Empirical evidence of stigma associated with backstop facilities like the DW has been provided by Peristiani (1998), Furfine (2001), Armantier et al (2015, Anbil (2018), Vossmeyer (2019), Anbil and Vossmeyer (2019), Beyhaghi and Gerlach (2023), and Armantier and Cipriani (2024). Formal models of emergency lending with stigma have been proposed by Ennis and Weinberg (2013), La'O (2014), Ennis (2019), Gorton and Ordonez (2020), Hu andZhang (2023), andChe et al (2023). To the best of our knowledge, A&H and the present paper are the only studies that focus on anti-stigma policies.…”

Interventions in Markets with Adverse Selection: Implications for Discount Window Stigma

“…This is the main difference with the model here, where only total income of the firm is observable; that is, “the return of old and new projects are fungible” (Philippon and Skreta , p. 3). Che, Choe, and Rhee () extend the model in Tirole () to allow for several rounds of play and study stigma when the government intervention takes the form of an asset‐purchases program.…”

Share pledge risk and government bailout fund

“…Others find government bailouts can intensify moral hazard and increase systemic risk (Del Viva et al, 2021; Diamond & Rajan, 2008; Fratianni & Marchionne, 2013). Further, Che et al (2022) argue that accepting a bailout signals a firm's balance‐sheet weakness and worsens its funding prospects.…”