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

American Economic Journal:
Economic Policy

ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)

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

  • Christian Mücke
  • Loriana Pelizzon
  • Vincenzo Pezone
  • Anjan Thakor
American Economic Journal: Economic Policy (Forthcoming)

Abstract

We empirically examine the Capital Purchase Program (CPP) used by the U.S. 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.

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