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Bank Bailout Menus

Listed author(s):
  • Sudipto Bhattacharya
  • Kjell G. Nyborg

We study bailouts of banks that suffer from debt overhang problems and have private information about the quality of their assets-in-place and new investment opportunities. Menus of bailout plans are used as a screening device. Constrained optimality involves overcapitalization and nonlinear pricing, with worse types choosing larger bailouts. When investment opportunities follow the assets, we derive an equivalence result between equity injections and asset buyouts. The larger capital outlay under asset buyouts can be offset by borrowing against the assets. If investment opportunities follow the bank, equity injections offer more upside to the bailout agency. This may reduce or enhance efficiency, depending on whether screening intensity is needed mostly on assets-in-place or new investments.

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File URL: http://hdl.handle.net/10.1093/rcfs/cft001
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Article provided by Oxford University Press in its journal The Review of Corporate Finance Studies.

Volume (Year): 2 (2013)
Issue (Month): 1 ()
Pages: 29-61

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Handle: RePEc:oup:rcorpf:v:2:y:2013:i:1:p:29-61.
Contact details of provider: Web page: https://academic.oup.com/rcfs

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  1. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  3. Jean Tirole, 2012. "Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning," American Economic Review, American Economic Association, vol. 102(1), pages 29-59, February.
  4. Huberman, Gur, 1984. " External Financing and Liquidity," Journal of Finance, American Finance Association, vol. 39(3), pages 895-908, July.
  5. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  6. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Dorothea Schäfer & Klaus Zimmermann, 2009. "Bad bank(s) and the recapitalisation of the banking sector," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 44(4), pages 215-225, July.
  8. Augustin Landier & Kenichi Ueda, 2009. "The Economics of Bank Restructuring; Understanding the Options," IMF Staff Position Notes 2009/12, International Monetary Fund.
  9. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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