Bailout Stigma

ABSTRACT We develop a model of bailout stigma in which accepting a bailout signals a firm's balance‐sheet weakness and reduces its funding prospects. To avoid stigma, high‐quality firms withdraw from subsequent financing after receiving bailouts or refuse bailouts altogether to send a favorable signal. The former leads to a short‐lived stimulation followed by a market freeze even worse than if there were no bailout. The latter revives the funding market, albeit with delay, to the level achievable without any stigma and implements a constrained optimal outcome. A menu of multiple bailout programs compounds bailout stigma and exacerbates the market freeze.