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Credit Relationships and Business Bankruptcy During the Great Depression

Mary Hansen and Nicolas Ziebarth

No 2014-11, Working Papers from American University, Department of Economics

Abstract: Credit relationships are sticky. Stickiness makes relationships beneficial for borrowers in distress, but potentially problematic for them when lenders face distress. To examine stickiness in a time of distress, we exploit a natural experiment during the Depression that generated differences in banking outcomes. Using a new dataset from Dun & Bradstreet and original bankruptcy filings, we show that greater distress increased exit by up to 16 percent. Distress did not generate more bankruptcies, but it changed the geographical distribution of creditors of bankrupt businesses. This is consistent with a contraction of business-to-business credit where there was greater distress.

Date: 2014
New Economics Papers: this item is included in nep-ban and nep-his
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