Assessing TARP

We study the government equity infusions into banks under the Capital Purchase Program (CPP) of the Troubled Asset Relief Program (TARP). Strong banks opted out of CPP, and equity infusions were provided to banks that posed systemic risk and faced high financial distress costs but had strong asset quality. Concerns over executive compensation led banks to reject CPP infusions and exit the program. CPP infusions did not have meaningful certification effects, but the subsequent stress tests conducted for the major banks had significant certification effects. CPP equity infusions increased investor expectations regarding future regulatory interventions in the banking sector. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.