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

We empirically examine the Capital Purchase Program (CPP) used by US government to bail out distressed banks with equity infusions during Great Recession. find strong evidence that a feature of CPP - government's ability appoint independent directors on board an assisted bank missed six dividend payments Treasury helped attenuate bailout-related moral hazard. Banks were averse these appointments empirical distribution exhibits sharp discontinuity at five. Director led improved performance, lower CEO pay, and higher stock market valuations.