Financial Distress in the Great Depression / John R. Graham, Sonali Hazarika, Krishnamoorthy Narasimhan.

Format:

Book

Author/Creator:

Graham, John R.

Contributor:

National Bureau of Economic Research.

Hazarika, Sonali.

Narasimhan, Krishnamoorthy.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17388.

NBER working paper series no. w17388

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

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.

Notes:

Print version record

September 2011.