| Using event study methodology, this paper examines the short-term effects on the greater domestic economy of nine government bailouts of the private sector: Lockheed (1970), Penn Central Railroad (1971), Franklin National Bank (1974), Chrysler (1980), Continental Illinois National Bank and Trust Company (1984), Savings and Loan (multiple institutions 1989), Long-Term Capital Management (1998), the Airline Industry (2001) and the most recent bailouts enacted through the Troubled Asset Relief Program (2008 and 2009). This paper seeks to answer whether government bailouts of the private sector have an impact on the attitudes of the overall market and on overall economic output in the short term and whether bailout size or industry matter regarding the final outcome.;As the results show, the public bailout of a private firm or industry appears to have a small, but significant, positive impact on the S&P 500 in the very short term, with the positive results showing up as quickly as one quarter after the bailout event. Due to the ease and efficiency with which trading can be done, investor expectations of the financial markets are quickly factored into the pricing and indexing, thus enabling the S&P to serve as a leading indicator of economic recovery or recession.;The speed with which the S&P incorporates new information is even more pronounced when the bailout occurs in the financial industry, with a statistically significant increase in the S&P of 8.1% the quarter after a financial industry bailout versus 5.0% for bailouts in general, signifying an increase in investor confidence in the government's ability to manage and mitigate a financial crisis.;When measuring the impact on overall economic growth or GDP, however, the presence of a bailout does not appear to significantly influence GDP either way in the very short term. If there is indeed an impact on GDP, positive or negative, it likely ripples through the economy at large at a slower rate and thus, is not picked up by our short-term data.;This changes, however, when the bailout occurs in the financial industry, with a statistically significant drop in GDP in the quarter following the bailout. The drop in output can perhaps be attributed to the lagged effect of the negative economic event that caused the need for the bailout in the first place. The fact that this occurs only in the quarter after a financial industry bailout and not after bailouts in general demonstrates the frightening speed with which the highly-interconnected financial industry impacts the performance of the economy as a whole, supporting the need for additional financial regulation, transparency and risk management practices.;Interestingly, the results of the paper follow much of the pattern we are seeing from the bailouts 18 months ago, with stock prices rising a few months after the bailout while the larger economy is just now, 18 months later, experiencing real economic growth. To fully understand the effects of a public bailout of a private firm or industry, though, additional research will need to be conducted with an extended time horizon from which to measure long-term impacts as well as potential unintended consequences stemming from the moral hazard of bailout policies. |
