Corporate Governance, Debt, and Investment Policy During the Great Depression

34 Pages Posted: 21 Sep 2011

See all articles by John R. Graham

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Sonali Hazarika

Zicklin School of Business, Department of Economics and Finance, Baruch College - The City University of New York

Krishnamoorthy Narasimhan

PIMCO

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Date Written: September 2011

Abstract

We study a period of severe disequilibrium to investigate whether board characteristics are related to corporate investment, debt usage, and firm value. During the 1930-1938 Depression era, when the corporate sector was shocked by an unprecedented downturn, we document a relation between board characteristics and firm performance that varies in economically sensible ways: Complex firms (that would benefit more from board advice) exhibit a positive relation between board size and firm value, and simple firms exhibit a negative relation between board size and firm value. Moreover, simple firms with large boards do not downsize adequately in response to the severe economic contraction: they invest more (or shrink less) and use more debt during the 1930s. We document similar effects for the number of outside directors on the board. Finally, we also find that companies with properly aligned governance structures are more likely to replace the company president following poor performance.

Suggested Citation

Graham, John Robert and Hazarika, Sonali and Narasimhan, Krishnamoorthy, Corporate Governance, Debt, and Investment Policy During the Great Depression (September 2011). NBER Working Paper No. w17387, Available at SSRN: https://ssrn.com/abstract=1931157

John Robert Graham (Contact Author)

Duke University ( email )

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National Bureau of Economic Research (NBER)

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Sonali Hazarika

Zicklin School of Business, Department of Economics and Finance, Baruch College - The City University of New York ( email )

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New York, NY 10010
United States

HOME PAGE: http://https://zicklin.baruch.cuny.edu/faculty-profile/sonali-hazarika/

Krishnamoorthy Narasimhan

PIMCO ( email )

United States

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