Hostname: page-component-78c5997874-ndw9j Total loading time: 0 Render date: 2024-11-18T07:34:15.673Z Has data issue: false hasContentIssue false
  • English
  • Français

Friends During Hard Times: Evidence from the Great Depression

Published online by Cambridge University Press:  19 July 2023

Tania Babina ,
Diego García  and
Geoffrey Tate Open the ORCID record for Geoffrey Tate [Opens in a new window]
Tania Babina
Affiliation:
Columbia University Graduate School of Business tania.babina@gsb.columbia.edu
Diego García
Affiliation:
University of Colorado Leeds School of Business diego.garcia@colorado.edu
Geoffrey Tate*
Affiliation:
University of Maryland Robert H. Smith School of Business and NBER
*
gtate@umd.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Using a novel data set of over 3,500 public and private firms, we construct the network of executive and director connections prior to the 1929 financial market crash. We find that more connected firms have 17% higher 10-year survival rates. Consistent with a working capital channel, the results are strongest for small, private, cash-poor firms, and firms located in counties with high bank suspension rates. Moreover, connections to cash-rich firms that increase accounts receivable matter the most. Our results suggest that network connections can play a stabilizing role during a financial crisis by easing the flow of capital to constrained firms.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 6 , September 2024 , pp. 2647 - 2694
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Asaf Bernstein, Charles Calomiris, Lauren Cohen, Cesare Fracassi, Carola Frydman, Xavier Giroud, Jarrad Harford (the editor), Eric Hilt, Niklas Huether, Jim Linck, Shawn Mobbs, Lyndon Moore, Alminas Zaldokas, and seminar participants at the 2017 Annual FIRS Conference, the 2017 Spring Finance Conference at the University of Texas at Dallas, the 2017 LBS Summer Symposium, the University of Melbourne’s 2017 Financial Institutions, Regulation, and Corporate Governance Conference, the 2018 Annual Meeting of the American Economic Association, the 2017 Olin Conference on Corporate Finance, the 2018 UBC Winter Finance Conference, the 2017 Annual Meeting of the European Finance Association, the 2017 HKUST Finance Symposium, George Mason University, and the University of Maryland for helpful comments. Abhilasha Anantharamakrishnan, Shivam Choudhary, Antony Anyosa Galvez, Fotis Grigoris, Jason Kang, Alexander Keith, Thao Mai, Aksh Nijhara, Tianshu Ren, Amey Sharma, Yidi Wu, and Zhen Ye provided excellent research assistance. All remaining errors are our own.

References

Adelino, M.; Ferreira, M. A.; Giannetti, M.; and Pires, P.. “Trade Credit and the Transmission of Unconventional Monetary Policy.” Review of Financial Studies, 36 (2023), 775–813.CrossRefGoogle Scholar
Ahern, K. R. “Network Centrality and the Cross Section of Stock Returns.” Working Paper, University of Southern California (2013).CrossRefGoogle Scholar
Almeida, H.; Kim, C.; and Kim, H. B.. “Internal Capital Markets in Business Groups.” Journal of Finance, 70 (2015), 2539–2586.CrossRefGoogle Scholar
Amore, M. D.; Caselli, S.; Colla, P.; and Corbetta, G.. “Board Connections and Debt Structure in Private Firms.” Working Paper, Bocconi University (2019).Google Scholar
Asker, J.; Farre-Mensa, J.; and Ljungqvist, A.. “Corporate Investment and Stock Market Listing: A Puzzle?” Review of Financial Studies, 28 (2015), 342–390.CrossRefGoogle Scholar
Banerjee, A. V. “A Simple Model of Herd Behavior.” Quarterly Journal of Economics, 107 (1992), 797–817.CrossRefGoogle Scholar
Benmelech, E.; Frydman, C.; and Papanikolaou, D.. “Financial Frictions and Employment During the Great Depression.” Journal of Financial Economics, 133 (2019), 541–563.CrossRefGoogle Scholar
Bernanke, B. S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” American Economic Review, 73 (1983), 257–276.Google Scholar
Bikhchandani, S.; Hirshleifer, D.; and Welch, I.. “A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades.” Journal of Political Economy, 100 (1992), 992–1026.CrossRefGoogle Scholar
Buchuk, D.; Larrain, B.; Prem, M.; and Urzua, F.. “How Do Internal Capital Markets Work? Evidence from the Great Recession.” Review of Finance, 24 (2020), 847–889.CrossRefGoogle Scholar
Cai, Y., and Sevilir, M.. “Board Connections and M&A Transactions.” Journal of Financial Economics, 103 (2012), 327–349.CrossRefGoogle Scholar
Calomiris, C. W. “Financial Factors in the Great Depression.” Journal of Economic Perspectives, 7 (1993), 61–85.CrossRefGoogle Scholar
Calomiris, C. W.; Jaremski, M. S.; and Wheelock, D. C.. “Interbank Connections, Contagion and Bank Distress in the Great Depression.” Working Paper, Columbia University (2019).CrossRefGoogle Scholar
Calomiris, C. W., and Mason, J. R.. “Fundamentals, Panics, and Bank Distress During the Depression.” American Economic Review, 93 (2003a), 1615–1647.CrossRefGoogle Scholar
Calomiris, C. W., and Mason, J. R.. “Consequences of Bank Distress During the Great Depression.” American Economic Review, 93 (2003b), 937–947.CrossRefGoogle Scholar
Currie, L. “The Decline of the Commercial Loan.” Quarterly Journal of Economics, 45 (1931), 698–709.CrossRefGoogle Scholar
Das, S. R.; Mitchener, K. J.; and Vossmeyer, A.. “Systemic Risk and the Great Depression.” NBER Working Paper No. 25405 (2018).Google Scholar
Ellison, G., and Fudenberg, D.. “Rules of Thumb for Social Learning.” Journal of Political Economy, 101 (1993), 612–643.CrossRefGoogle Scholar
Ellison, G., and Fudenberg, D.. “Word-of-Mouth Communication and Social Learning.” Quarterly Journal of Economics, 110 (1995), 93–125.CrossRefGoogle Scholar
Engelberg, J.; Gao, P.; and Parsons, C. A.. “Friends with Money.” Journal of Financial Economics, 103 (2012), 169–188.CrossRefGoogle Scholar
Fishback, P.; Kantor, S.; and Wallis, J.. “Can the New Deal’s Three Rs be Rehabilitated?” Explorations in Economic History, 40 (2003), 278–307.CrossRefGoogle Scholar
Fracassi, C. “Corporate Finance Policies and Social Networks.” Management Science, 63 (2017), 2420–2438.CrossRefGoogle Scholar
Fracassi, C., and Tate, G.. “External Networking and Internal Firm Governance.” Journal of Finance, 67 (2012), 153–194.CrossRefGoogle Scholar
Frydman, C., and Hilt, E.. “Investment Banks as Corporate Monitors in the Early 20th Century United States.” American Economic Review, 107 (2017), 1938–1970.CrossRefGoogle Scholar
Gao, J. “Managing Liquidity in Production Networks: The Role of Central Firms.” Review of Finance (2021), 819–861.CrossRefGoogle Scholar
García-Appendini, E., and Montoriol-Garriga, J.. “Firms as Liquidity Providers: Evidence from the 2007–2008 Financial Crisis.” Journal of Financial Economics, 109 (2013), 272–291.CrossRefGoogle Scholar
Giroud, X., and Mueller, H. M.. “Firms’ Internal Networks and Local Economic Shocks.” American Economic Review, 109 (2019), 3617–3649.CrossRefGoogle Scholar
Goel, A. M., and Thakor, A. V.. “Do Envious CEOs Cause Merger Waves?” Review of Financial Studies, 23 (2010), 487–517.CrossRefGoogle Scholar
Gofman, M., and Wu, Y.. “Trade Credit and Profitability in Production Networks.” Journal of Financial Economics, 143 (2022), 593–618.CrossRefGoogle Scholar
Graham, J. R.; Hazarika, S.; and Narasimhan, K.. “Financial Distress in the Great Depression.” Financial Management, 40 (2011), 821–844.CrossRefGoogle Scholar
Graham, J. R.; Kim, H.; and Leary, M.. “CEO-Board Dynamics.” Journal of Financial Economics (2020), 612–636.CrossRefGoogle Scholar
Graham, J. R.; Leary, M. T.; and Roberts, M. R.. “A Century of Capital Structure: The Leveraging of Corporate America.” Journal of Financial Economics, 118 (2015), 658–683.CrossRefGoogle Scholar
Guner, B.; Malmendier, U.; and Tate, G.. “Financial Expertise of Directors.” Journal of Financial Economics, 88 (2008), 323–354.CrossRefGoogle Scholar
Hermalin, B., and Weisbach, M. S.. “Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature.” FRB New York – Economic Policy Review, 9 (2003), 7–26.Google Scholar
Hoberg, G., and Phillips, G.. “Text-Based Network Industries and Endogenous Product Differentiation.” Journal of Political Economy, 124 (2016), 1423–1465.CrossRefGoogle Scholar
Huang, Q.; Jiang, F.; and Lie, E.. “The Value of Social Networks During Periods of Distress.” Working Paper, City University of Hong Kong and University of Iowa (2012).CrossRefGoogle Scholar
Hwang, B. H., and Kim, S.. “It Pays to Have Friends.” Journal of Financial Economics, 93 (2009), 138–158.CrossRefGoogle Scholar
Lee, J., and Mezzanotti, F.. “Bank Distress and Manufacturing: Evidence from the Great Depression.” Working Paper, Northwestern University (2017).Google Scholar
Loualiche, E.; Vickers, C.; and Ziebarth, N. L.. “Firm Networks in the Great Depression.” Working Paper, University of Minnesota (2019).Google Scholar
Love, I.; Preve, L. A.; and Sarria-Allende, V.. “Trade Credit and Bank Credit: Evidence from Recent Financial Crises.” Journal of Financial Economics, 83 (2007), 453–469.CrossRefGoogle Scholar
Mitchener, K., and Richardson, G.. “Network Contagion and Interbank Amplification During the Great Depression.” Journal of Political Economy, 127 (2019), 465–507.CrossRefGoogle Scholar
Mizruchi, M. S. The American Corporate Network 1904–1974. Beverly Hills, CA: Sage Publications (1982).Google Scholar
Mizruchi, M. S. “Relations Among Large American Corporations, 1904–1974.” Social Science History, 7 (1983), 165–182.CrossRefGoogle Scholar
Nanda, R., and Nicholas, T.. “Did Bank Distress Stifle Innovation During the Great Depression?” Journal of Financial Economics, 114 (2014), 273–292.CrossRefGoogle Scholar
Nguyen, B. D. “Does the Rolodex Matter? Corporate Elite’s Small World and the Effectiveness of Boards of Directors.” Management Science, 58 (2012), 236–252.CrossRefGoogle Scholar
Opler, T. C., and Titman, S.. “Financial Distress and Corporate Performance.” Journal of Finance, 49 (1994), 1015–1040.CrossRefGoogle Scholar
Reifer, W. W.; Friday, D.; Lichtenstein, W.; and Riddle, J. H.. “Changes in the Capital Requirements of Business Enterprise and the Decline of the Commercial Loan.” In A Program of Financial Research Vol 1: Report of the Exploratory Committee on Financial Research (UMI). Cambridge, MA: NBER (1937), 43–46.Google Scholar
Richardson, G. “Categories and Causes of Bank Distress During the Great Depression, 1929–1933: The Illiquidity Versus Insolvency Debate Revisited.” Explorations in Economic History, 44 (2007), 588–607.CrossRefGoogle Scholar
Richardson, G. “Categories and Causes of Bank Distress During the Great Depression.” Research in Economic History, 1 (2008), 37–115.Google Scholar
Santioni, R.; Schiantarelli, F.; and Strahan, P. E.. “Internal Capital Markets in Times of Crisis: The Benefit of Group Affiliation in Italy.” Review of Finance, 24 (2020), 773–811.CrossRefGoogle Scholar
Schmidt, B. “Costs and Benefits of Friendly Boards During Mergers and Acquisitions.” Journal of Financial Economics, 117 (2015), 424–447.CrossRefGoogle Scholar
Shue, K. “Executive Networks and Firm Policies: Evidence from the Random Assignment of MBA Peers.” Review of Financial Studies, 26 (2013), 1401–1442.CrossRefGoogle Scholar
Stock, J. H., and Yogo, M.. “Testing for Weak Instruments in Linear IV Regression.” In Identification and Inference for Econometric Models: Essays in Honor of Thomas Rothenberg, Andrews, D. W. K. and Stock, J. H., eds. Cambridge, UK: Cambridge University Press (2005), 80–108.CrossRefGoogle Scholar
Xia, C.; Zhang, X.; Cao, C.; and Xu, N.. “Independent Director Connectedness in China: An Examination of the Trade Credit Financing Hypothesis.” International Review of Economics & Finance, 63 (2019), 209–225.CrossRefGoogle Scholar
Yermack, D. “Higher Market Valuation of Companies with a Small Board of Directors.” Journal of Financial Economics, 40 (1996), 185–211.CrossRefGoogle Scholar
Ziebarth, N. L. “Identifying the Effects of Bank Failures from a Natural Experiment in Mississippi During the Great Depression.” American Economic Journal: Macroeconomics, 5 (2013), 81–101.Google Scholar
Supplementary material: File

Babina et al. supplementary material

Babina et al. supplementary material
Download Babina et al. supplementary material(File)
File 467.5 KB