The US Government’s Successful Restructuring of GM: Measuring the Effect of the US Government Bailout on GM’s Return to Profitability

Abstract

There is an ongoing debate over whether the US government’s bailouts of GM and Chrysler were a success. One of the major achievements of the US government auto bailouts was that it successfully managed restructuring the fast-failing GM and Chrysler such that they were able to return to being profitable, self-sufficient enterprises. Critics of the US government bailouts, however, claim that the politicized bailouts left GM and Chrysler in a less competitive position than they would have been in had they undergone a traditional reorganization under Chapter 11. This paper empirically demonstrates the significant, positive effect the US government’s bailouts, restructurings, and other supportive measures had on GM’s return to profitability. The identification strategy for this effect is the measure of the difference in alphas between two regressions on GM’s stock returns – one taken over a sample period before and another taken over the sample period after GM’s bailout. The regression specification is modeled after the CAPM to facilitate identification of abnormal returns due to factors besides systematic risk. The business of governments providing bailouts to troubled companies is tricky, but given the proven success of the US government’s bailout of GM and Chysler, future policymakers now have a valuable template for designing effective bailout plans.