Financial Distress in the Great Depression

John R. Graham, Sonali Hazarika and Krishnamoorthy Narasimhan

No 17388, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G0 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-cfn and nep-his
Note: TWP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Graham, John R., Sonali Hazarika, and Krishnamoorthy Narasimhan, 2011, Financial Distress in the Great Depression, Financial Management 40, 821-844. -- Lead article

Downloads: (external link)
http://www.nber.org/papers/w17388.pdf (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:nbr:nberwo:17388

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w17388

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().