Journal of Law, Finance, and Accounting > Vol 6 > Issue 1

Government Equity Investments in Coronavirus Bailouts: Why, How, When?

William Megginson, University of Oklahoma, USA and University of International Business and Economics, Beijing, China, , Veljko Fotak, University at Buffalo, USA and Sovereign Investment Lab, BAFFI Carefin, Bocconi University, Italy,
Suggested Citation
William Megginson and Veljko Fotak (2021), "Government Equity Investments in Coronavirus Bailouts: Why, How, When?", Journal of Law, Finance, and Accounting: Vol. 6: No. 1, pp 1-49.

Publication Date: 06 May 2021
© 2021 W. Megginson and V. Fotak
Corporate finance,  Corporate governance,  Industrial organization,  Public economics,  American political development,  Government,  Political economy
JEL Codes: E58, E69, G1, G12, G32, G38, H11, H60, H81, J54, L69, L91, Q41
Bailouts, equity capital injectionspreferred stock and warrantscentral bank policiesfiscal and stabilization policiesTARPtransportation and hospitality industries


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In this article:
1. How Does Today’s “Liquidity Crisis” Differ from Previous Supply-Shock and Financial Crises? 
2. How Are the US Stimulus/Rescue Packages Structured—and Are These Appropriate? 
3. Why Will Equity Purchases Likely Be Needed? 
4. Lessons from Past Equity Bailouts 
5. Which Firms Should Receive Equity Injections? 
6. How Can Governments Invest in Corporate Equity? 
7. What should be the government’s timing and exit strategy? 
8. How can the government inject equity capital into private (unlisted) companies? 
9. Our Recommendations 


Governments around the world are attempting to support individuals’ incomes, rescue distressed businesses, and preserve jobs affected by the coronavirus pandemic by adopting fiscal stimulus programs of unprecedented scale. Although the bulk of this spending will involve direct payments to individuals or some type of direct lending or loan guarantees to businesses, large sums likely will (and should) take the form of government purchases of equity in distressed firms—either by direct purchase or by exercising warrants attached to rescue loans. We discuss why we think these equity injections will be necessary, but only in a limited number of cases; how they should be structured; when investments should be made and, almost as important, exited. We summarize (and tabulate) both the modest recent history of governments rescuing non-financial firms with equity injections and the voluminous research examining the efficacy of governments rescuing failing banks using equity investments. We highlight the dangers that would likely arise if governments permanently retain and vote the equity stakes purchased during the current crisis. Where equity investments must be made, we argue that these should: (1) be effective, in being large enough to be decisive; (2) be passive after the initial injection, when some financial restrictions should be imposed; (3) be temporary and preferably self-liquidating through openmarket sales or redemptions; (4) provide taxpayers an upside claim if and when the rescued firm recovers; (5) be restricted to exchange-listed companies in all but extreme cases; and (6) be timely, as speed is crucial. In most cases, the default instrument to employ should be either non-voting preferred stock or warrants that convert into immediately marketable common shares.