Do Business Borrowers Benefit from Bank Bailouts? - The Effects of TARP on Loan Contract Terms

We investigate benefits to business borrowers from bank bailouts – specifically the Troubled Asset Relief Program (TARP). Applying difference-in-difference methodology to loan-level data, we find more favorable contract terms in five dimensions – spread, amount, maturity, collateral, and covenants –suggesting increased credit supply to borrowers of bailed-out banks at the intensive margin. Findings are robust to dealing with endogeneity and other issues. Riskier borrowers benefit more, consistent with moral hazard exploitation. Small and unlisted borrowers benefit less, suggesting fewer benefits for more financially-constrained firms. Benefits accrue to both relationship and non-relationship borrowers. Results contribute to research and policy debates on bank bailouts