Banks, Insider Connections, and Industrialization in New England: Evidence from the Panic of 1873
This paper studies the role of bank affiliations in mitigating frictions related to asymmetric information. The analysis focuses on Massachusetts, and tests whether firms with bank directors on their boards fared better following the Panic of 1873, which did not directly impact the state’s commercial banks, but produced a prolonged economic slump. Around 59 percent of all non-financial corporations in the state had a bank director on their board in 1872. These firms survived the recession of the 1870s at higher rates, grew faster and experienced less of a deterioration in their credit ratings. Consistent with banker-directors helping to resolve problems related to asymmetric information, these effects were strongest among young firms. Counterfactual estimates suggest that in the absence of bank affiliations, the total assets of the non-financial corporations in Massachusetts that existed in 1872 would have been 35 percent lower in the wake of the recession. These results suggest an important role for the banking sector in New England’s industrialization, namely that affiliations with commercial banks helped nonfinancial corporations maintain access to external finance during economic downturns.
I would like to thank Katharine Liang, Paige Kirby, Chloe Peters, and June Wang for research assistance. The author declares that he has no relevant or material financial interests that relate to the research described in this paper. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.