Date of Award
Doctor of Philosophy (PhD)
Dr. Diego Escobari
Dr. Dave O. Jackson
Dr. Andre Mollick
In the wake of this financial crisis 2007-2009, the government injected approximately $604 billion into financial sector to increase liquidity and improve capital base for the bailout banks, which in order to restore market confidence and to prevent bank runs and possible contagion effects.
The main purpose of this dissertation is to assess the appropriateness and effects of the bailout program between 2008 and 2009. Chapter 1 introduces the causes and the effects of the recent financial crisis. Chapter 2 explains the bailout program-Capital Purchase Program (CPP) in details and discusses the sample section method used in this dissertation. There is limited empirical research focus on the bailout effects by the government as a lender of last resort. How effective the government intervention is on the banking industry becomes an ongoing open question which needs to be answered.
In Chapter 3, I find that the increased liquidity injected by the government bailout to the banking industry has reduced firm's cost of equity. I also document the moderating effect of institutional ownership on the impact of government bailout on banks' cost of equity; the reduction in cost of equity brought about with the government bailout is larger in magnitude among banks with higher institutional investor shareholding, especially for banks dominated by domestic and grey institutional investors.
In Chapter 4, I revisit the idiosyncratic volatility (IVOL)-return puzzle using alternative measures of idiosyncratic volatility and investigate the determinants of the change in IVOL using a unique group of bailout banks in the recent financial crisis during 2007-2009. Return is positively related to the lagged realized IVOL. The findings show that the financial bailout does not deter the risk-taking behavior among banks to the fullest, especially for the banks with highest IVOL. Furthermore, I document the important role of corporate governance and information asymmetry on banks' IVOL.
In Chapter 5, I investigate how institutional ownership stability and aggregate shareholding affect bailout banks' decision on CPP bailout exit. I document that firms with better institutional ownership stability and high institutional ownership shareholding tend to pay back bailout funds in a shorter timeframe. The results are robust with control of size, non-performing loan, efficiency, profitability and capital ratio. On the other hand, firms with lower institutional ownership shareholding and less stable institutional ownership take longer time to repay CPP funds.
University of Texas-Pan American