Corporate Survival and Managerial Experiences During the Great Depression
نویسندگان
چکیده
We study corporate performance during and after the Great Depression for all industrial firms on the NYSE. Our first goal is to identify the factors that contribute to business insolvency and valuation during the period 1928 to 1938. To this end, we examine factors such as debt policy, credit-worthiness, corporate governance, and investment. Our second goal is to determine whether experiences during the Depression had a lasting effect on corporate decisions in the 1940s. We find that firms with more debt and lower bond ratings in 1928 had a greater probability of becoming financially distressed during the Great Depression. The value loss associated with high leverage for ‘value’ firms is very significant, while the effect for ‘growth’ firms is small. The probability of encountering distress during the Depression is also related to operating profits and firm size in the year prior to the occurrence of distress. We also find that companies with large boards, and boards dominated by insiders, are less likely to survive the Depression. Finally, we find that the Depression experience appears to have affected the preference to use debt, even after the economic environment improved: Firms that were highly levered during the Depression use relatively little debt in the 1940s. Moreover, this behavior appears to be individual-specific because the use of debt increases in the 1940s at companies for which the Depression-era company president retires or otherwise leaves the firm. *We thank Michael Bradley, Alon Brav, Murillo Campello, Harry DeAngelo, Laura Field, David Hsieh, Pete Kyle, Mike Lemmon, Dennis Sheehan, Sheri Tice, Mike Weisbach, and seminar participants at Duke, Indiana University, Penn State, Tulane, and UCLA for valuable feedback. We acknowledge financial support from the Hartman Center at the Fuqua School of Business. Graham acknowledges financial support from an Alfred P. Sloan Foundation fellowship. This paper previously circulated as “The Causes and Consequences of Corporate Distress after an Unexpected Negative Economic Shock: Evidence from The Great Depression” as one chapter of Narasimhan’s Ph.D. dissertation at Duke University. Any errors are ours alone. Several papers examine firm-by-firm data for parts of the 1930s, though none focus on corporate solvency or performance during the Depression. Holderness, Kroszner, and Sheehan (1999) use the first SEC-mandated declaration of stock ownership to compare management stock positions in 1935 to those in 1995 and find that stock ownership increased over these sixty years. Gordon (1936, 1938) examines the same SEC ownership data for a smaller set of firms. Hadlock and Lumer (1997) examine the rate of top management turnover and the sensitivity of management turnover to stock returns for a sample of firms from 1933 to 1941. Ely and Waymire (1999) use firm level accounting data to examine the relation between intangible assets in 1927 and pre-Depression stock prices for a sample of industrial firms. Christie and Nanda (1994) study the effects of the undistributed profits surcharge tax on dividend behavior in 1936 and 1937. Burch, Christie, and Nanda (2003) examine rights offerings during the 1930s and 1940s. Taussig and Baker (1925) use survey data to examine the corporation and its executives between 1904 and 1914. See footnote 10 for a description of Stigler and Freidland (1983). 1 The Great Depression caused significant economic, social and political turmoil and is arguably the most important economic event of the 20 Century. Bernanke (1995) says, “To understand the Great Depression is the Holy Grail of macroeconomics.” While macroeconomists have long studied the Great Depression, to date there is little firm-by-firm analysis of this era. Bernstein (1987, p. 50) states that “the dearth of firm-specific evidence” has forced economists to rely on industry-wide data in an attempt to infer the actions of individual companies. In this paper, we investigate whether firm characteristics had differential effects on corporate solvency and performance during the Great Depression era. We remove the need for inference based on industry-level data by directly examining firm-level data for all industrial firms on the NYSE from 1928 to 1938. To date, our paper is the most comprehensive examination of the Depression era at the level of the firm. Note that we do not attempt to identify corporate behaviors that caused or contributed to the Depression. Instead, we assume that the Depression occurred exogenously and use this environment to study corporate solvency and valuation during a stressful period. Studying corporations during the Great Depression contributes in several ways to our understanding of financial economics. First, studying the Depression is important in its own right, given the magnitude of the event. To understand whether a severe economic shock like the
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