Impact of Government Bailout on Banks' Cost of Equity: Additional Evidence from the Financial Bailout of 2008-2009

Wang, D., Ngo, T., Houmes, R., Esqueda, O. (2020). Impact of Government Bailout on Banks’ Cost of Equity: Additional Evidence from the Financial Bailout of 2008-2009. (Review of Pacific Basin Financial Markets and Policies), Forthcoming

29 Pages Posted: 19 Oct 2020

See all articles by Daphne Wang

Daphne Wang

Jacksonville University

Thanh Ngo

East Carolina University

Robert Houmes

Jacksonville University

Omar A. Esqueda

Tarleton State University - Department of Accounting, Finance, & Economics

Date Written: January 4, 2020

Abstract

This study evaluates the effect of the Capital Purchase Program during the 2008-2009 financial crisis on the cost of equity of 170 publicly listed banks in the United States that received funding. We document robust evidence that the liquidity provided by the government bailout reduced the cost of equity for recipient banks, especially for those banks that repaid their bailout funds in full. The decrease in the cost of equity is particularly significant for banks with high market-to-book ratios, low concentrations of institutional ownership, and those with at least one large blockholder. Our findings have important implications for the assessment of government bailout programs and future regulation of financial institutions.

Keywords: Bank, Capital Purchase Program (CPP), Cost of Equity (COE), Financial Bailout, Troubled Asset Relief Program (TARP)

JEL Classification: G01, G14, G21, G23, G28

Suggested Citation

Wang, Daphne and Ngo, Thanh and Houmes, Robert and Esqueda, Omar A., Impact of Government Bailout on Banks' Cost of Equity: Additional Evidence from the Financial Bailout of 2008-2009 (January 4, 2020). Wang, D., Ngo, T., Houmes, R., Esqueda, O. (2020). Impact of Government Bailout on Banks’ Cost of Equity: Additional Evidence from the Financial Bailout of 2008-2009. (Review of Pacific Basin Financial Markets and Policies), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3540969 or http://dx.doi.org/10.2139/ssrn.3540969

Daphne Wang (Contact Author)

Jacksonville University ( email )

2800 University Blvd. N
Jacksonville, FL 32211
United States

HOME PAGE: http://https://www.ju.edu/directory/shu-nu-daphne-wang.php

Thanh Ngo

East Carolina University ( email )

Greenville, NC 27858
United States

Robert Houmes

Jacksonville University ( email )

Jacksonville, FL 32211
United States

Omar A. Esqueda

Tarleton State University - Department of Accounting, Finance, & Economics ( email )

Stephenville, TX 76402
United States
(254)968-9908 (Phone)

HOME PAGE: http://tarleton.edu

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