BUFFALO, N.Y. -- Do corporate bailouts actually work? According
to a recent study, some bailouts work better than others, depending
on the conditions surrounding them.
In a study of post-bailout performance of 104 corporate bailouts
in 21 countries between 1987 and 2005, researchers found that in
certain circumstances, bailed-out firms eventually recover to a
point where their post-bailout performance is at least as good as
before the bailout.
Kenneth Kim, associate professor, and Zhan Jiang, assistant
professor, both in the University at Buffalo School of Management,
and Hao Zhang, assistant professor, in the Rochester Institute of
Technology, were somewhat surprised by their findings, because,
"bailouts imply rescuing a firm that capital markets are unwilling
to serve." But closer investigation revealed the degree to which
firms recovered depended upon several factors.
Firms with the best recovery were those that experienced
declines in performance less than a year before to their bailout.
These "sudden decliners" experienced a recovery of about 117
percent. Firms that had more prolonged declines (one to three
years) before being bailed out, only recovered to about 93 percent
of their previous value.
Kim and his colleagues contend that sudden decliners probably
experienced some type of external shock beyond the firm's control,
such as a change in the industry, the 9/11 terrorist attack or the
Asian financial crisis.
"This means that it makes more sense to rescue firms that have
been otherwise strong than to keep afloat 'prolonged decliner'
firms that have been weak or inefficient for some time," says
In addition, bailed-out firms that were distressed primarily
because they had problems servicing their debt recovered better
than bailed-out firms that were distressed because they were
"Again, this makes sense," says Kim. "The former were
profitable; they just needed a hand."
How companies were bailed out and who bailed them out also
impacted bailout success.
Companies bailed out through debt relief had recovery that was
16.7 percent greater than companies that were bailed out with cash
injections. The researchers speculate that this is so because cash
is easier to mismanage. In fact, the researchers found that in the
year after a cash bailout, executive and employee compensation
"Essentially, this suggests that executives of firms that
receive cash as part of their bailout almost immediately give their
employees and themselves raises," says Kim.
Finally, firms can be bailed by governments, shareholders and,
in bank-centered economies such as Germany and Japan, banks can
bail out their client firms. Kim and his fellow researchers found
that firms recovered more fully from nongovernmental bailouts. They
offer three explanations for this finding. First, governments don't
monitor firms post-bailout as closely as large shareholders and
banks. Second, governments may bail out a firm to keep people
employed or to keep the economy going, regardless of the firm's
performance. And third, governments are more inclined to bail out
firms with government connections.
These findings, the researchers say, provide important
considerations for the public and policy makers.
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