Who Gets a Lifeline?A Political Economy of Corporate Bailouts

Michael Smith

Columbia University

Friday, November 8 2012

Michael Smith Who Gets a Lifeline?

Why do some firms get bailed out, and others don’t?

Great Recession: auto bailouts in US, CA, DE; not SW or SK

9/11 – SARS: airlines in NZ, JP, BE, US, UK; not AU or FR

Michael Smith Who Gets a Lifeline?

Possible Explanation I: Systemic Risk

Exists when failure has substantial impact on broader economy

Transmission mechanisms from micro to macro: contagion

Contagion risk higher for larger firms in leveraged industries

Michael Smith Who Gets a Lifeline?

Possible Explanation II: Special Interest Influence

Bailouts are a transfer to a special interest

Political characteristics limit special interest influence:Democratic Institutions (Rosas 2006, 2009; Keefer, 2002, 2007)Veto Players (Keefer, 2002, 2007)

Impending Elections (Brown and Dinc, 2005; Keefer, 2002, 2007)

Michael Smith Who Gets a Lifeline?

Possible Explanation III: Partisanship

Left-wing governments more keen on intervention (Garrettand Lange, 1989, 199; Alvarez et al., 1991)

Support for labor implies support for employee-rich firms(Hibbs, 1977; Cameron, 1984)

Michael Smith Who Gets a Lifeline?

Empirical Strategy

Need a sample of distressed firms, some of which bailed out

Media keyword search to find them

Firms matched with Compustat and Orbis

Produces 597 firms; 152 bailed out (25%)

Michael Smith Who Gets a Lifeline?

Ailing Firms and Bailouts by Industry

Manufacturing

Finance & Insurance

Transportation

Information

Construction

Retail Trade

Wholesale Trade

Real Estate

Utilities

Professional Services

Other Services

Arts, Recreation

Natural Resources

Hospitality

Health Care

Educational Services Distressed FirmsBailout Share

0 25 50 75 100 125 150 175

Distressed Firms and Bailouts by Industry

Michael Smith Who Gets a Lifeline?

Ailing Firms and Bailouts by Country

Natural Log of Number of Distressed Firms

Per

cent

Bai

led

Out

US

JP

GB

FR

KR

DE

ITRU

BE

MXCA

IDNO

CN

NL

GRMY

ES

NZ

TH

IE

CZ

KZNG

CH

FI

PL

HU

IL

AE

PH

LV

BR

RO

DK

IN

PT

ATLUBA

TWSK

BG SG AUSEZAGH AR

1 2 3 4 5

020

4060

8010

0

Distressed Firms and Bailouts by Country

Michael Smith Who Gets a Lifeline?

Multivariate Analysis

Unit of analysis is the firm; DV is bailout dummy

Collect country and firm-year data

Logit models with bootstrap clustered standard errors

Michael Smith Who Gets a Lifeline?

Independent and Control Variables

Systemic Risk

ln(Employees) and Finance

Special Interest Influence

Election in next year, ln(Checks), Polity

PartisanshipLeft and Right dummies

Left interaction with ln(Employees)

ControlsBankruptcy risk: Z-ScoreGDP growth

International constraints: WTO, Reg 659

Michael Smith Who Gets a Lifeline?

Special Interest Model Rejected

ln(Emp) 3yr

Finance

Election, t+1

ln(Checks)

Polity-2 -1 0 1 2

95% CI Coefficient

ln(Emp) 3yr

Finance

Right-2 -1 0 1 2

95% CI Coefficient

Michael Smith Who Gets a Lifeline?

Left-Wing Governments Bail Out Employee-Rich Firms

-.20

.2.4

.6.8

Mar

gina

l Effe

ct o

f Lef

t Gov

erna

nce

0 2 4 6ln(Employees)

Estimate95% CI90% CI

Michael Smith Who Gets a Lifeline?

Concluding Remarks

Presented a novel dataset of bailouts

Bailouts occur not just in finance

Rejected special interest influence argument

Confirmed relevance of systemic risk

Right-wing governments lower bailout probability by 13%

Left-wing government bail out employee-rich firms

Michael Smith Who Gets a Lifeline?

Concluding Remarks

Thank you for coming!

Michael Smith Who Gets a Lifeline?

Extra Slides: Bailout Definition

Definition: government actions, explicitly or implicitly fundedby public resources, that seek to avoid the failure ordissolution of a distressed company or industry.

Numerous forms: cash grants, loans or loan guarantees,acquisition of trouble assets, equity investment, temporaryacquisition or conservatorship, and full nationalization

Michael Smith Who Gets a Lifeline?

Extra Slides: Distress Search Terms

“fac* bankruptcy,” “near* bankrupt*,” “avoid* bankrupt*,”“verge of bankruptcy,” “fac* insolvency,” “near* insolven*,”“avoid* insolvency,” “verge of insolvency,” “go bankrupt,”“going bankrupt,” “brink of insolvency,” or “financial*distress*”

Michael Smith Who Gets a Lifeline?

Extra Slides: Bailout Search Terms

firm name and ”bail out,” ”bailout,” ”bail-out,” ”bailedout,” ”rescue package,” ”rescue plan,” and ”rescue aid”

Michael Smith Who Gets a Lifeline?

Extra Slides: Z-Score Construction

Z-Score: Zi = 1.2X1i + 1.4X2i + 3.3X3i + 0.6X4i + 1.0X5i

where X1i is the firm’s working capital over total assets, X2i isretained earnings over total assets, X3i is earnings beforeinterests and taxes over total assets, X4i is market value ofequity over book value of total liabilities, and X5i is sales overtotal assets.

Michael Smith Who Gets a Lifeline?

Extra Slides: Differences in Means and Proportions

ln(Emp.) ln(Checks) Polity/10

Not Bailed OutBailed OutDifference

Difference in Means Between Firms by Bailout Status

−0.

50.

00.

51.

01.

52.

02.

53.

03.

5

Finance Election next Year Right

Not Bailed OutBailed OutDifference

Difference in Proportions Between Firms by Bailout Status

−0.

20.

00.

20.

40.

6

Michael Smith Who Gets a Lifeline?

Extra Slides: Ailing Firms and Bailouts by Year

010

2030

4050

60

1987 1991 1995 1999 2003 2007 2010

Cou

nt

00.

250.

5

Rat

io

Distressed Firms and Bailouts by Year

Distressed FirmsBailoutsRatio

Michael Smith Who Gets a Lifeline?

Extra Slides: Count of Ailing Firms and Bailouts byCountry

USA

Fran

ceJa

pan

UKFR

G/G

erm

any

ROK

Italy

Russ

iaBe

lgiu

mM

exico

Indo

nesia

Norw

ayNe

ther

land

sCa

nada

PRC

Thai

land

New

Zeal

and

Mal

aysia

Spai

nIre

land

Gre

ece

Finl

and

Pola

ndRo

man

iaSw

itzer

land

Indi

aKa

zakh

stan

UAE

Braz

ilHu

ngar

yDe

nmar

kPh

ilippi

nes

Portu

gal

Nige

riaLa

tvia

Isra

elBu

lgar

iaLu

xem

bour

gAu

stra

liaBo

snia−H

erz

Gha

naSi

ngap

ore

Slov

akia

S. A

frica

Arge

ntin

aSw

eden

Taiw

anAu

stria

Distressed FirmsBailouts

0

50

100

150

200Count of Distressed Firms and Bailouts by Country

Michael Smith Who Gets a Lifeline?

Extra Slides: Random Intercept Models

ln(Emp) 3yr

Finance

Election, t+1

Polity

ln(Checks)

Right-2 -1 0 1 2

95% CI Coefficient

ln(Emp) 3yr

Finance

Election, t+1

Polity

ln(Checks)

Left-2 -1 0 1 2

95% CI Coefficient

Michael Smith Who Gets a Lifeline?

Michael Smith Who Gets a Lifeline?