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NBER Working Papers and Publications
|September 2011||Corporate Governance, Debt, and Investment Policy during the Great Depression|
with John R. Graham, Sonali Hazarika: w17387
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 nu...
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.
|Financial Distress in the Great Depression|
with John R. Graham, Sonali Hazarika: w17388
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 th...
Published: Graham, John R., Sonali Hazarika, and Krishnamoorthy Narasimhan, 2011, Financial Distress in the Great Depression, Financial Management 40, 821-844. -- Lead article