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The cohabitation of institutional investors with the government: a case study of the TARP-CPP program

The cohabitation of institutional investors with the government: a case study of the TARP-CPP program
The cohabitation of institutional investors with the government: a case study of the TARP-CPP program
We take advantage of a unique setting taken place in the U.S. during the financial crisis of 2007–2009 to examine institutional investors’ investment behavior surrounding government investments. We examine 202 publicly-listed banks that received bailout funds through the Troubled Asset Relief Program Capital Purchase Program (TARP-CPP). We document that banks with higher existing institutional ownership, especially long-term oriented institutional ownership, were more likely to receive CPP funding. These banks were also more likely to pay back bailout funds in a shorter timeframe. We argue that the institutional investors profitably exploited the market signals emanating from TARP-CPP. Initially, they supported banks’ access to cheap TARP-CPP funding from the U.S. Treasury, which also benefits them as shareholders. Next, they espoused the recipient banks’ decision to repay the CPP funds expeditiously by issuing new shares to manifest their capital-raising ability to the U.S. Treasury which causes a dilutive effect.
CPP, Financial Crisis, Institutional Ownership, Institutional investors, TARP
2214-6350
Wang, Daphne
01d83e6b-ea03-45ef-b598-b9fffce0b28d
Jory, Surendranath
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh
852ea7b9-fd74-4a39-9281-87626e50886b
Wang, Daphne
01d83e6b-ea03-45ef-b598-b9fffce0b28d
Jory, Surendranath
2624eb24-850a-48f6-b3c6-c96749b87322
Ngo, Thanh
852ea7b9-fd74-4a39-9281-87626e50886b

Wang, Daphne, Jory, Surendranath and Ngo, Thanh (2020) The cohabitation of institutional investors with the government: a case study of the TARP-CPP program. Journal of Behavioral and Experimental Finance, 28, [100382]. (doi:10.1016/j.jbef.2020.100382).

Record type: Article

Abstract

We take advantage of a unique setting taken place in the U.S. during the financial crisis of 2007–2009 to examine institutional investors’ investment behavior surrounding government investments. We examine 202 publicly-listed banks that received bailout funds through the Troubled Asset Relief Program Capital Purchase Program (TARP-CPP). We document that banks with higher existing institutional ownership, especially long-term oriented institutional ownership, were more likely to receive CPP funding. These banks were also more likely to pay back bailout funds in a shorter timeframe. We argue that the institutional investors profitably exploited the market signals emanating from TARP-CPP. Initially, they supported banks’ access to cheap TARP-CPP funding from the U.S. Treasury, which also benefits them as shareholders. Next, they espoused the recipient banks’ decision to repay the CPP funds expeditiously by issuing new shares to manifest their capital-raising ability to the U.S. Treasury which causes a dilutive effect.

Text
JBEF_2020_21_version accepted - Accepted Manuscript
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More information

Accepted/In Press date: 20 July 2020
e-pub ahead of print date: 27 July 2020
Keywords: CPP, Financial Crisis, Institutional Ownership, Institutional investors, TARP

Identifiers

Local EPrints ID: 442933
URI: http://eprints.soton.ac.uk/id/eprint/442933
ISSN: 2214-6350
PURE UUID: 1a555f08-6ca4-4c61-b64a-a528e100bb06
ORCID for Surendranath Jory: ORCID iD orcid.org/0000-0002-8265-0001

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Date deposited: 03 Aug 2020 16:30
Last modified: 28 Apr 2022 02:08

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Contributors

Author: Daphne Wang
Author: Thanh Ngo

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