Corporate Governance, Debt, and Investment Policy During the Great Depression

John R. Graham (), Sonali Hazarika () and Krishnamoorthy Narasimhan ()
Additional contact information
John R. Graham: Fuqua School of Business, Duke University, Durham, North Carolina 27708; and National Bureau of Economic Research, Cambridge, Massachusetts 02138
Sonali Hazarika: Baruch College, City University of New York, New York, New York 10010
Krishnamoorthy Narasimhan: Pacific Investment Management Company, Newport Beach, California 92660

Management Science, 2011, vol. 57, issue 12, 2083-2100

Abstract: We study a period of severe disequilibrium to investigate whether board characteristics are related to corporate investment, debt usage, and firm value. During the 1930-1938 Depression era, when the corporate sector was shocked by an unprecedented downturn, we document a relation between board characteristics and firm performance that varies in economically sensible ways: Complex firms (that would benefit more from board advice) exhibit a positive relation between board size and firm value, and simple firms exhibit a negative relation between board size and firm value. Moreover, simple firms with large boards do not downsize adequately in response to the severe economic contraction: they invest more (or shrink less) and use more debt during the 1930s. We document similar effects for the number of outside directors on the board. Finally, we also find that companies with properly aligned governance structures are more likely to replace the company president following poor performance. This paper was accepted by Wei Xiong, finance.

Keywords: corporate governance; capital structure; investment policy; Great Depression; stock market value (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.1110.1415 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:57:y:2011:i:12:p:2083-2100

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().