Corporate Size and the Bailout Factor

Government Preferences and SEC Enforcement

“…These firms receive government support in various forms such as import protection and subsidies in the form of tax favors and bailouts as they contribute significantly to the employment conditions in their industry or region (Adams and Brock 1986, 1987a, 1987b.…”

“…To promote these conditions governments of both parties have long supported large employers through, for instance, bailouts, tax favors or subsidies in order to prevent huge job losses or the destabilization of an entire industry (Adams and Brock 1987a, 1987b.…”

Regulator preferences and managers’ manipulation choices

“…As the government's goal is to maximize political support, which comes in the form of votes, it responds to both constituent and special interest pressure by adjusting its political decisions and measures accordingly (Stigler 1971). Given that employment conditions are proven to systematically affect future electoral outcomes (Hibbs 2006), the government has long favored a policy to promote these conditions by supporting not only large employers in absolute terms, but also smaller, labor-intense firms that contribute to future employment (Adams and Brock 1987b;Audretsch 2003;Caves 1976). As SEC enforcement actions can take down firms that are important for the government's policy of promoting employment, the SEC and its Commissioners are likely to face political pressure from the government to spare labor-intense firms from enforcement actions.…”

“…In addition, the government also promotes employment by supporting specific firms that contribute significantly to the overall employment conditions. In particular, firms that are perceived as being too big to fail receive government support in various forms such as import protection, regulatory delays, and subsidies in the form of tax favors and bailouts (Adams and Brock 2004, 1987b, 1987a. Chrysler, for instance, has been bailed out by the government to prevent huge job losses and destabilization of the entire manufacturing sector at the end of the 1970s and 2000s (Adams and Brock 1987a;Barnes 2009).…”

“…Therefore, the government has long favored a policy to promote employment conditions by supporting not only large employers in absolute terms, but also smaller businesses that employ a large number of people in relative terms and contribute to future employment. As a consequence, the government has preferences not just for large firms but also for smaller, labor-intense firms as they contribute to the overall employment conditions (Adams and Brock 2004, 1987b, 1987aCaves 1976;Hillman et al 1987;Audretsch 2003). As job losses are a direct consequence of bankruptcy, bankruptcy of labor-intense firms will result in relatively more job losses than bankruptcy of firms that are less labor-intense.…”