Friends During Hard Times: Evidence from the Great Depression

39 Pages Posted: 2 Sep 2016

See all articles by Tania Babina

Tania Babina

Columbia Business School - Finance and Economics

Diego Garcia

University of Colorado at Boulder

Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: September 1, 2016

Abstract

We use differences in firm outcomes around the 1929 financial market crash to test whether network connections to other firms through executive and directors increase value. We find that firms that had more connections on the eve of the crisis in 1928 have higher 10-year survival rates during the Great Depression. Consistent with a financing channel, we find that the results are particularly strong for small firms, private firms and firms with small cash holdings relative to the sample median at the time of the shock. Moreover, connections to cash-rich firms are stronger predictors of survival, overall and among financially constrained firms. Because of the greater segmentation of markets in the 1920s and 1930s than in modern data samples, we can mitigate the potential endogeneity of network connections at the time of the shock by exploiting variation in the local demand for directors’ services. We also find evidence that the information that flows through network links increases the odds that a firm will be acquired.

Suggested Citation

Babina, Tania and Garcia, Diego and Tate, Geoffrey A., Friends During Hard Times: Evidence from the Great Depression (September 1, 2016). 2nd Annual Financial Institutions, Regulation and Corporate Governance Conference, Available at SSRN: https://ssrn.com/abstract=2833896 or http://dx.doi.org/10.2139/ssrn.2833896

Tania Babina

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Diego Garcia (Contact Author)

University of Colorado at Boulder ( email )

1070 Edinboro Drive
Boulder, CO 80309
United States

Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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