The Carrot and the Stick: Bank Bailouts and the Disciplining Role of Board Appointments

68 Pages Posted: 8 Jul 2021

See all articles by Christian Mücke

Christian Mücke

Leibniz Institute for Financial Research SAFE

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice

Vincenzo Pezone

Goethe University Frankfurt - Research Center SAFE

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: July 6, 2021

Abstract

We empirically examine the Capital Purchase Program (CPP) used by the US gov- ernment to bail out distressed banks with equity infusions during the Great Recession. We find strong evidence that a feature of the CPP – the government’s ability to ap- point independent directors on the board of an assisted bank that missed six dividend payments to the Treasury – helped attenuate bailout-related moral hazard. Banks were averse to these appointments – the empirical distribution of missed payments exhibits a sharp discontinuity at five. Director appointments by the Treasury led to improved bank performance, lower CEO pay, and higher stock market valuations.

Keywords: Bank Bailout, TARP, Capital Purchase Program, Dividend Pay- ments, Board Appointments, Bank Recapitalization

JEL Classification: G01, G2, G28, G38, H81

Suggested Citation

Mücke, Christian and Pelizzon, Loriana and Pezone, Vincenzo and Thakor, Anjan V., The Carrot and the Stick: Bank Bailouts and the Disciplining Role of Board Appointments (July 6, 2021). SAFE Working Paper No. 316, Available at SSRN: https://ssrn.com/abstract=3881871 or http://dx.doi.org/10.2139/ssrn.3881871

Christian Mücke

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Vincenzo Pezone

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33706 (Phone)

HOME PAGE: http://sites.google.com/site/vpezone/

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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