Bailout Stigma

doi:10.1111/jofi.13386

Bailout Stigma

2024-08-23

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DOI：10.1111/jofi.13386

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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.

Keywords:

ADVERSE SELECTION

DISCOUNT WINDOW

FINANCIAL CRISIS

TRADING DYNAMICS

MARKET

INTERVENTIONS

INFORMATION

RELUCTANCE

BORROW

Bailout Stigma

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