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

• In Event: Economic Impact and Market Reactions

Abstract

We evaluate the effect of the government bailout during the 2008-2009 financial crisis on the cost of equity of 227 public-listed banks that receive the funding. We find that the increased liquidity injected by the government bailout to banking industry has reduced firm’s cost of equity. We also document the moderating effect of institutional ownership on the impact of government bailout on banks’ cost of equity; higher institutional investor shareholding contributes to reduced cost of equity, especially for the firms dominated by domestic and grey institutional investors. Our findings have important implications for the assessment of government bailout program, and investment management practices such as portfolio allocation and performance evaluation.

Authors

• Daphne Wang, Jacksonville University

• Thanh N. Ngo, East Carolina University

• Omar A Esqueda, Tarleton State University

• Robert Houmes, Jacksonville University