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

Author

Listed:
  • Daphne Wang

    (Davis College of Business, Jacksonville University, Jacksonville, FL 32211, USA)

  • Robert Houmes

    (Davis College of Business, Jacksonville University, Jacksonville, FL 32211, USA)

  • Thanh Ngo

    (College of Business, East Carolina University, Greenville, NC 27858, USA)

  • Omar Esqueda

    (College of Business Administration, Tarleton State University, Stephenville, TX 76402, USA)

Abstract

The Capital Purchase Program (CPP) was the first and most significant program under the Troubled Asset Relief Program (TARP) during 2008–2009 financial crisis. This study evaluates the effect of the CPP during this period on the cost of equity of 170 publicly listed banks in the United States that received funding. To control for the potential effects of endogeneity on our results, we use a propensity score matched sample of non-CPP banks. Using this approach, 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. This decrease in the cost of equity is particularly significant for banks with high market-to-book ratios, low concentrations of institutional ownership, and those banks with at least one large blockholder. Our findings have important implications for the assessment of government bailout programs and the future regulation of financial institutions.

Suggested Citation

  • Daphne Wang & Robert Houmes & Thanh Ngo & Omar Esqueda, 2021. "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 (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 24(01), pages 1-41, March.
    • Handle: RePEc:wsi:rpbfmp:v:24:y:2021:i:01:n:s021909152150003x
    DOI: 10.1142/S021909152150003X
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