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Financial Distress in the Great Depression

Financial Management, Forthcoming

AFA 2012 Chicago Meetings Paper

40 Pages Posted: 16 Mar 2011 Last revised: 24 Sep 2013

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Sonali Hazarika

CUNY Baruch College

Krishnamoorthy Narasimhan


Date Written: August 3, 2011


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 had a greater probability of becoming financially distressed during the Great Depression. 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 Great Recession and find that higher leverage and lower bond ratings also increased the probability of becoming financially distressed during this period.

Suggested Citation

Graham, John R. and Hazarika, Sonali and Narasimhan, Krishnamoorthy, Financial Distress in the Great Depression (August 3, 2011). Financial Management, Forthcoming; AFA 2012 Chicago Meetings Paper. Available at SSRN:

John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sonali Hazarika (Contact Author)

CUNY Baruch College ( email )

17 Lexington Avenue
New York, NY 10010
United States

Krishnamoorthy Narasimhan

PIMCO ( email )

United States

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