Financial Distress in the Great Depression

42 Pages Posted: 21 Sep 2011 Last revised: 4 Jan 2021

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

Date Written: September 2011

Abstract

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.

Suggested Citation

Graham, John Robert and Hazarika, Sonali and Narasimhan, Krishnamoorthy, Financial Distress in the Great Depression (September 2011). NBER Working Paper No. w17388, Available at SSRN: https://ssrn.com/abstract=1931158

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 )

17 Lexington Avenue
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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