Financial Distress in the Great Depression

Abstract

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 1928‐1938. 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.

The Impact of Capital Structure on Firm Performance: Empirical Evidence from Nigeria

“…This implies that the firms' performance decrease as the firms increase in age. Though, this is agreed with Graham et al, (2011) who posit that young firms tend to be prone to distress during a negative stock business period. Similarly, the sale maintains significant and positive ROA.…”

“…Thus, older firms tend to be more profitable due to their well established operational strategies in producing various goods/services to meet various customers' demands. However, Graham et al, (2011) posit that young firms tend to be prone to distress during a negative stock business period. Similarly, Carroll (2003) observes that young firm is prone to failure because of diversion of their resources to establish internal routines, developing credible exchange relationship, and training of the employees.…”

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“…However, work experience with finance reduces genetic predispositions to investment biases [39]. A recent literature examines how personal experiences affect managers' beliefs, financial decisions and willingness to take risk [13,40,41].…”

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“…For example, Chava and Jarrow (2004) add industry effects to their hazard model and find that their inclusion significantly improves the predictive ability of the model. Graham et al (2011) study the factors that contributed to business insolvency during the Great Depression. They find that firms with more debt and lower bond ratings became financially distressed more frequently during the Depression.…”