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

82 Pages Posted: 8 Jul 2021 Last revised: 8 Nov 2023

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 - Dipartimento di Economia

Vincenzo Pezone

Tilburg University - Department of Finance

Anjan V. Thakor

Washington University in St. Louis - John M. Olin Business School; Financial Theory Group; European Corporate Governance Institute (ECGI); Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

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Date Written: November 1, 2023

Abstract

We empirically examine the Capital Purchase Program (CPP) used by the US government to bail out distressed banks and its implications for regulatory policy. We find strong evidence that a feature of the CPP – the government’s ability to appoint independent directors on the board of an assisted bank that missed six dividend payments to Treasury – had a significant effect on bank behavior. Banks were averse to these appointments – the empirical distribution of missed payments exhibits a sharp discontinuity at five. Director appointments by Treasury were associated with improved bank performance and lower CEO pay.

Keywords: Bank Bailout, TARP, Capital Purchase Program, Dividend Payments, 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 (November 1, 2023). 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 - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Vincenzo Pezone

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Anjan V. Thakor

Washington University in St. Louis - John M. Olin Business School ( email )

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

Financial Theory Group ( email )

United States

European Corporate Governance Institute (ECGI) ( email )

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

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street, E62-618
Cambridge, MA 02142
United States

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