Financial Distress in the Great Depression
We use firm-level data to study corporate performance during the Great Depression era for all industrial firms on the NYSE. Our goal is to identify the factors that contribute to business insolvency and valuation changes during the period 1928 to 1938. We find that firms with more debt and lower bond ratings in 1928 became financially distressed more frequently during the Depression, consistent with the trade-off theory of leverage and the information production role of credit rating agencies. We also document for the first time that firms responded to tax incentives to use debt during the Depression era, but that the extra debt used in response to this tax-driven "debt bias" did not contribute significantly to the occurrence of distress. Finally, we conduct an out of sample test during the recent 2008-2009 Recession and find that higher leverage and lower bond ratings also increased the occurrence of financial distress during this period.
|Date of creation:||Sep 2011|
|Publication status:||published as Graham, John R., Sonali Hazarika, and Krishnamoorthy Narasimhan, 2011, Financial Distress in the Great Depression, Financial Management 40, 821-844. -- Lead article|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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- Schiffman, Daniel A., 2003. "Shattered Rails, Ruined Credit: Financial Fragility and Railroad Operations in the Great Depression," The Journal of Economic History, Cambridge University Press, vol. 63(03), pages 802-825, September.
- Christie, William G & Nanda, Vikram, 1994. " Free Cash Flow, Shareholder Value, and the Undistributed Profits Tax of 1936 and 1937," Journal of Finance, American Finance Association, vol. 49(5), pages 1727-1754, December.
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- Charles W. Calomiris & R. Glenn Hubbard, 1993. "Internal Finance and Investment: Evidence from the Undistributed Profits Tax of 1936-1937," NBER Working Papers 4288, National Bureau of Economic Research, Inc.
- Timothy R. Burch & William G. Christie & Vikram Nanda, 2004. "Do Firms Time Equity Offerings? Evidence from the 1930s and 1940s," Financial Management, Financial Management Association, vol. 33(1), Spring.
- R. A. Gordon, 1938. "Ownership by Management and Control Groups in the Large Corporation," The Quarterly Journal of Economics, Oxford University Press, vol. 52(3), pages 367-400.
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