Government Equity Investments in Coronavirus Bailouts: Why, How, When?

36 Pages Posted: 26 Mar 2020 Last revised: 14 Apr 2020

See all articles by William L. Megginson

William L. Megginson

University of Oklahoma

Veljko Fotak

School of Management, University at Buffalo (SUNY); Sovereign Investment Lab, Baffi Carefin, Bocconi University

Date Written: April 14, 2020


Governments around the world are attempting to support individuals’ incomes, rescue distressed businesses, and preserve employer-employee relationships damaged in the coronavirus pandemic by adopting fiscal stimulus programs of unprecedented scale. Although the bulk of this spending will involve direct payments to individuals or some type of direct lending or loan guarantees to businesses, large sums will (and should) take the form of government purchases of equity in distressed firms — either by direct purchase or by exercising warrants attached to rescue loans. We discuss why we think these equity injections will be necessary, but only in a limited number of cases; how they should be structured; when investments should be made and, almost as important, exited. We summarize (and tabulate) both the modest recent history of governments rescuing non-financial firms with equity injections and the voluminous research examining the efficacy of governments rescuing failing banks using equity investments. We highlight the dangers that would likely arise if governments permanently retain and vote the equity stakes purchased during the current crisis. Where equity investments must be made, we argue that these should: (1) be effective, in being large enough to be decisive; (2) be passive after the initial injection, when some financial restrictions should be imposed; (3) be temporary and preferably self-liquidating through open-market sales or redemptions; (4) provide taxpayers an upside claim if and when the rescued firm recovers; (5) be restricted to exchange-listed companies in all but extreme cases; and (6) be timely, as speed is crucial. In most cases, the default instrument to employ should be either non-voting preferred stock or warrants that convert into immediately marketable common shares, and we present a numerical example of how a preferred stock-with-warrants equity investment could pay off handsomely for taxpayers if rescued companies recover even partially.

Keywords: Bailouts; Equity capital injections; Preferred stock & warrants; Central bank policies; Fiscal & stabilization policies; TARP; Transportation & hospitality industries; Corporate governance

JEL Classification: E58; E69; G1, G12, G18, G32, G38, H11; H60; H81; J54; L69; L91; Q41

Suggested Citation

Megginson, William L. and Fotak, Veljko, Government Equity Investments in Coronavirus Bailouts: Why, How, When? (April 14, 2020). Available at SSRN: or

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)


Veljko Fotak

School of Management, University at Buffalo (SUNY) ( email )

School of Management, University at Buffalo
236 Jacobs Management Center
Buffalo, NY 14260
United States
+1 716-645-1541 (Phone)

Sovereign Investment Lab, Baffi Carefin, Bocconi University ( email )

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