Journal of Finance Vol. 79 No. 5 2024
Bailout Stigma
Abstract
We develop a model of bailout stigma in which accepting a bailout signals a firm's balance‐sheet weakness and reduces its funding prospects. To avoid stigma, high‐quality firms withdraw from subsequent financing after receiving bailouts or refuse bailouts altogether to send a favorable signal. The former leads to a short‐lived stimulation followed by a 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 and implements a constrained optimal outcome. A menu of multiple bailout programs compounds bailout stigma and exacerbates the market freeze.
- DOI
- 10.1111/jofi.13386
- Volume
- 79
- Issue
- 5
- Pages
- 2993-3039
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref