Friends During Hard Times: Evidence from the Great Depression
70 Pages Posted: 17 Sep 2016 Last revised: 25 Jul 2018
Date Written: September 1, 2017
We test whether network connections to other firms through executives and directors increase value by exploiting differences in survival rates in response to a common negative shock. We analyze a novel dataset of over 3500 public and private firms from 1928. We find that firms that had more connections on the eve of the 1929 financial market crash 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, cash-poor firms, and firms located in counties with high bank suspension rates during the crisis. 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.
Keywords: network, firm performance, management, directors, Great Depression
JEL Classification: G30, G32, L14, N00
Suggested Citation: Suggested Citation