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Efficient Recapitalization

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Author Info
Thomas Philippon
Philipp Schnabl
Abstract

We analyze public interventions to alleviate debt overhang among private firms when the government has limited information and limited resources. We first compare the efficiency of buying equity, buying risky assets, and providing debt guarantees. With compulsory participation, all the interventions are equivalent. With endogenous participation, buying equity dominates the two other interventions. We extend our results to deposit insurance, debt covenants, and heterogeneity across assets. Finally, we propose a constrained-efficient mechanism where the government makes a subordinated loan in exchange for call options on equity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14929.

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Date of creation: Apr 2009
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Handle: RePEc:nbr:nberwo:14929

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Find related papers by JEL classification:
G01 - Financial Economics - - General - - - Financial Crises
G2 - Financial Economics - - Financial Institutions and Services
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
H0 - Public Economics - - General
H2 - Public Economics - - Taxation, Subsidies, and Revenue
H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans and Credits

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