Corporate Survival and Managerial Experiences During the Great Depression

Abstract:     
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.

JEL Classifications: B15,B22,G32,G33,G34,G39,K22,L10,M21,M41,N00

Working Paper Series