Corporate Governance, Debt, and Investment Policy during the Great Depression

John R. Graham, Sonali Hazarika, Krishnamoorthy Narasimhan

NBER Working Paper No. 17387
Issued in September 2011
NBER Program(s):   TWP

We study a period of severe disequilibrium to investigate whether board characteristics are related to corporate investment, debt usage, and firm value. During the 1930-1938 Depression era, when the corporate sector was shocked by an unprecedented downturn, we document a relation between board characteristics and firm performance that varies in economically sensible ways: Complex firms (that would benefit more from board advice) exhibit a positive relation between board size and firm value, and simple firms exhibit a negative relation between board size and firm value. Moreover, simple firms with large boards do not downsize adequately in response to the severe economic contraction: they invest more (or shrink less) and use more debt during the 1930s. We document similar effects for the number of outside directors on the board. Finally, we also find that companies with properly aligned governance structures are more likely to replace the company president following poor performance.

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Document Object Identifier (DOI): 10.3386/w17387

Published: Graham, John R., Sonali Hazarika, and Krishnamoorthy Narasimhan, 2011, Corporate Governance, Debt, and Investment Policy during the Great Depression, Management Science 57, 2083-2100.

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