LAUSR

Abstract We take advantage of a unique setting taken place in the U.S. during the financial crisis of 2007–2009 to examine institutional investors’ investment behavior surrounding government investments. We examine 202 publicly-listed banks that received bailout funds through the Troubled Asset Relief Program Capital Purchase Program (TARP–CPP). We document that banks with higher existing institutional ownership, especially long-term oriented institutional ownership, were more likely to receive CPP funding. These banks were also more likely to pay back bailout funds in a shorter timeframe. We argue that the institutional investors profitably exploited the market signals emanating from TARP–CPP. Initially, they supported banks’ access to cheap TARP–CPP funding from the U.S. Treasury, which also benefits them as shareholders. Next, they espoused the recipient banks’ decision to repay the CPP funds expeditiously by issuing new shares to manifest their capital-raising ability to the U.S. Treasury which causes a dilutive effect.