AbstractThis study investigates the impact of the Capital Purchase Program (CPP) on recipient banks' efficiency. While the related literature typically relies on the Difference‐in‐Differences (DiD) approach, which has considerable limitations in this context, we conduct Instrumental Variable analyses by adopting three innovative instruments based on the influence of donations to political campaigns on receiving government support. Using data from 2000 to 2017, we find that CPP assistance has a significant negative causal relationship with recipient banks' efficiency. Our results are robust to alternative sample specifications and estimation methods.