Economic Effects of Runs on Early 'Shadow Banks': Trust Companies and the Impact of the Panic of 1907

65 Pages Posted: 28 Jul 2012

See all articles by Carola Frydman

Carola Frydman

Northwestern University; National Bureau of Economic Research (NBER)

Eric Hilt

National Bureau of Economic Research (NBER); Wellesley College

Lily Zhou

Federal Reserve Bank of New York; Sciences Po, Students

Date Written: July 2012

Abstract

We use the unique circumstances that led to the Panic of 1907 to analyze its impact on economic activity. The panic was fuelled by runs on the 'shadow banks' of the time, New York's trust companies. But the shock that triggered the runs was unrelated to the nonfinancial corporations affiliated with those institutions. Using newly collected data, we find that small corporations with close ties to the trust companies that lost the most deposits experienced an immediate decline in their stock price of 10.4 percentage points, and performed worse in the years following the panic across a range of outcomes, including their return on equity, which fell 13.1 percent, their dividend rate, which fell 22 percent, and their average interest costs, which rose 8.3 percent, relative to mean pre-panic levels. The effect on their investment rate was much greater: it fell by nearly 50 percent. The relative decline in investment induced by affiliations with the worst-affected trust companies alone accounted for at least 18.4 percent of the total decline in corporate investment in the United States in 1908. This effect diminished in magnitude over time but persisted for at least five years following the panic.

Suggested Citation

Frydman, Carola and Hilt, Eric and Zhou, Lily, Economic Effects of Runs on Early 'Shadow Banks': Trust Companies and the Impact of the Panic of 1907 (July 2012). NBER Working Paper No. w18264. Available at SSRN: https://ssrn.com/abstract=2119039

Carola Frydman (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Eric Hilt

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Wellesley College ( email )

106 Central St.
Wellesley, MA 02181
United States

HOME PAGE: http://www.erichilt.net

Lily Zhou

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Sciences Po, Students ( email )

28 Rue des Saint-Peres
Paris, Paris 75006
France

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