The Paulson Plan’s Competitive Effects

Abstract

The joint plan by the U.S. Treasury and the Federal Deposit Insurance Corporation, announced on Monday, October 13, 2008, represented the largest financial transfer from taxpayers to financial institutions in U.S. history. Existing academic studies have analyzed whether this massive state intervention improved the recipients’ financial health with a focus on the wealth effects for shareholders and creditors. An investigation of investor reactions to the initial Paulson plan announcement and 247 subsequent capital injection transactions reveals that this public intervention was everything but neutral with respect to competition among participants in the financial industry. The results suggest that the “too-big-to-fail” effect was in play. Concerns about potential competitive distortion effects are reinforced by the negative reactions of rivals’ stock market prices to capital injections directed toward large recipients.

Keywords: TARP, Paulson Plan, Competition

JEL Classification: G2