NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Efficient Recapitalization

Thomas Philippon, Philipp Schnabl

NBER Working Paper No. 14929
Issued in April 2009, Revised in December 2011
NBER Program(s):AP, CF, EFG, LE, ME, PE

We analyze government interventions to recapitalize a banking sector that restricts lending to firms because of debt overhang. We find that the efficient recapitalization program injects capital against preferred stock plus warrants and conditions implementation on sufficient bank participation. Preferred stock plus warrants reduces opportunistic participation by banks that do not require recapitalization, while conditional implementation limits free riding by banks that benefit from lower credit risk because of other banks' participation. Efficient recapitalization is profitable if the benefits of lower aggregate credit risk exceed the cost of implicit transfers to bank debt holders.

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Document Object Identifier (DOI): 10.3386/w14929

Published: Thomas Philippon & Philipp Schnabl, 2013. "Efficient Recapitalization," Journal of Finance, American Finance Association, vol. 68(1), pages 1-42, 02. citation courtesy of

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