Effectiveness of Bailouts in the EU

Abstract

Governments in the EU frequently bail out firms in distress by granting state aid. The results are threefold. First, the estimated discrete-time hazard rate increases during the first four years after the subsidy and drops after that, suggesting that some bailouts only delayed exit instead of preventing it. The number of failing bailouts could be reduced if European control was tougher. Second, governments' bailout decisions favored state-owned firms, even though state-owned firms did not outperform private ones in the survival chances. Third, subsidy choice is an endogenous variable in the analysis of the hazard rate. Treating it as exogenous underestimates its impact on the bankruptcy probability. Several policy implications of the results are discussed in the paper.

The impact of state aid on the survival and financial viability of aided firms

“…Our empirical results can further be put into perspective in light of earlier results reported in Glowicka (2006). Based on a data set of 86 R&R aid cases decided by the European Commission between 1995 and 2003, she finds that a significant fraction of the aid receiving firms eventually had to exit the market within the first four years despite receiving state aid.…”

“…In academia, the ex-post evaluation of the impact of, for example, R&D public policies on various outcome variables has long been attracting a substantial amount of research focusing on both various national levels and crosscountry comparisons (see, e.g., Bronzini and Piselli, 2016, Czarnitzki and Lopes-Bento, 2012, 2013, Dimos and Pugh, 2016, as well as Zúñiga-Vicente et al, 2012, and the respective literature cited there). In practice, the European Commission itself commissioned studies evaluating the impact of its R&D aid (see CERES, 2005) or its regional aid (see Ramboll & Matrix, 2013) Limiting ourselves to a review of the former set of articles, in an early contribution, Glowicka (2006) studies the effectiveness of bailouts in preventing bankruptcy. Using a data set of 86 R&R aid cases decided by the European Commission between 1995 and 2003 she compares survival probability between firms that received only rescue aid and firms that also received restructuring aid finding that restructuring aid is significantly more likely to prevent firm's market exit than rescue aid.…”

Investment and Capital Structure of Partially Private Regulated Firms

“…There is evidence that suggests that the probability of a bailout, b , increases with the state's stake in the firm δ. For instance, Glowicka () finds that distressed public firms are more likely to receive long‐term government assistance (“restructuring aid” ), while distressed private firms are more likely to receive only short‐term “rescue aid,” which is intended to keep them in operation until a restructuring plan is in place. Borisova et al.…”

“…There is evidence that suggests that the probability of a bailout, b, increases with the state's stake in the firm δ. For instance, Glowicka (2006) finds that distressed public firms are more likely to receive long-term government assistance ("restructuring aid" ), while distressed private firms are more likely to receive only short-term "rescue aid," which is intended to keep them in operation until a restructuring plan is in place. Borisova et al (2011) examine stock purchases in publicly traded companies by governments or state-owned investors and find strong support for the notion that debtholders view government ownership as an implicit assurance of repayment and protection against bankruptcy.…”

Bank bailouts: lessons to learn when patience is a virtue

“…7th Lesson (The long-term perspective of the social costs) Governments in the EU do often bailout firms in distress by granting state aid. Data from 86 cases during the years 1995-2003 (Glowicka, 2006) addressed two issues: the impact of bailouts on bankruptcy probability and the determinants of bailout policy.…”