Friends During Hard Times: Evidence from the Great Depression

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.