This paper theoretically analyzes how early corrective actions on troubledbanks affect bank risk-taking behavior. Early corrective actions considered inthis paper are classified into two categories: early closure and recapitalization.Early closure might be preferable to save explicit costs(deposit insurance fund)and suppress excessive risk-taking incentives, but there are implicit costs ofearly closure. When the regulatory authority chooses early closure as the earlycorrective action, banks take low risk level, which is, however, lower thanthe first-best level. On the other hand, when recapitalization is chosen as acorrective measure, the authority is able to induce banks to choose thefirst-best risk level. And also recapitalization is preferable from the socialwelfare point of view. Recapitalization gives better ex ante expected returns forbanks than early closure, so that there is Pareto improvement. The analysis ofthis paper can be a theoretical explanation why recapitalization is morefrequently observed than early closure as corrective actions for troubled banks.