TY  - JOUR
AU  - Graham,John R.
AU  - Hazarika,Sonali
AU  - Narasimhan,Krishnamoorthy
TI  - Financial Distress in the Great Depression
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17388
PY  - 2011
Y2  - September 2011
UR  - http://www.nber.org/papers/w17388
L1  - http://www.nber.org/papers/w17388.pdf
N1  - Author contact info:
John Graham
Duke University
Fuqua School of Business
100 Fuqua Drive
Durham, NC 27708-0120
Tel: 919/660-7857
Fax: 919/660-8038
E-Mail: john.graham@duke.edu

Sonali Hazarika
Baruch College/CUNY 
Zicklin School Of Business
One Bernard Baruch Way
55 Lexington Avenue at East 24th  
New York, NY 10010 
E-Mail: sonali.hazarika@baruch.cuny.edu

Krishnamoorthy Narasimhan
PIMCO
840 Newport Center Drive
Newport Beach, CA
E-Mail: Krishna.Narasimhan@pimco.com
AB  - We use firm-level data to study corporate performance during the Great Depression era for all industrial firms on the NYSE. Our goal is to identify the factors that contribute to business insolvency and valuation changes during the period 1928 to 1938. We find that firms with more debt and lower bond ratings in 1928 became financially distressed more frequently during the Depression, consistent with the trade-off theory of leverage and the information production role of credit rating agencies. We also document for the first time that firms responded to tax incentives to use debt during the Depression era, but that the extra debt used in response to this tax-driven “debt bias” did not contribute significantly to the occurrence of distress. Finally, we conduct an out of sample test during the recent 2008-2009 Recession and find that higher leverage and lower bond ratings also increased the occurrence of financial distress during this period.
ER  -