Why do governments favor bailout of companies rather than issuing new shares?

[DamienSF]

Isn't the public market supposed to offer public companies a way to recapitalize whenever they need it? In recent years public companies have been spending huge amounts of cash buying back their own shares. Wouldn't a functioning economy/financial system promote the issuance of new shares as the main mechanism to raise cash? It's obvious why public companies would prefer a bailout than issuing new shares but why government acting in the interest of its constituents would be so prompt to bail out public companies rather than having them raise cash through the public market? At the minimum wouldn't it be sound to condition a bailout amount to a fraction of cash raised through the market? Is there a way to explain this other than incompetence or corruption?

[mneil]

I'm just an average consumer. But to me, thinking about capitalism, businesses should not be bailed out ever by government. They should fail and new business will take it's place and do it better, faster, or cheaper.

That said, the shutdown is government mandated. We're completely outside the spectrum of capitalism at this point. There is no free market when the government intervenes at any point. Since the feds shut it down it does make some sense that they also prop it up.

[giantg2]

I agree. It also depends on how they prop it and to what extent they get involved.

For example, they became shareholders in of companies during the last bailout and even turned a profit. That's sort of free market because they are utilizing the existing market structure and investing sort of similarly to regular investors. The only concern is how they would exercise their voting rights if they choose to, especially if they ever became a majority owner.

[mxab]

You're forgetting that there are some businesses that have a special strategic importance for a country, for example airlines or defence-related stuff. The rules of capitalism don't really apply to those kind of businesses, because governments would like them to be around even if capitalism itself happens to come crashing down.

Also, since a government has to take into account the political fallout from any bankruptcy, e.g. joblessness, the decision to bail out a company can be a rational choice inside capitalism's framework of rules from the government's perspective, especially in countries with a stronger welfare system.

[giantg2]

The problem with recapitalization is that you need someone willing to capitalize you. If tens of millions of people have lost their jobs, this can cause a systemic impact that reduces the amount of capital available. Not only do they not have the money to invest because they lost their income, but also their 401k investment that their employer was potentially making for them stops.

With such a drastic change in market cap and other factors that come with stay at home orders, active and even index funds will rebalance. That rebalance will help some companies, but it will hurt others.

[DamienSF]

That would be true for private companies but I'm not sure what would prevent public companies to raise capital by issuing new shares. Obviously the stock price would take a hit but new capital would be raised. That's the function that public markets are supposed to fulfill.