Abstract
We develop a model of bailout stigma where accepting a bailout signals a firm's balance-sheet weakness and worsens its funding prospect. To avoid stigma, a firm with high-quality legacy assets either withdraws from subsequent financing after receiving a bailout or refuses a bailout altogether to send a favorable signal. The former leads to a short-lived stimulation with subsequent market freeze even worse than if there were no bailout. The latter revives the funding market, albeit with delay, to the level achievable without any stigma. Strikingly, a bailout offer is most effective when many firms reject it (to build a favorable reputation) rather than accept it.
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