| 'The Great Depression' is considered one of the most significant economic events of the 20th century; however, most analysis of the event has been from a macro economic perspective. In my dissertation, I use firm level data to study the event from a micro, firm level perspective.; I find that firms with higher leverage ratios and lower bond ratings in 1928 had a greater probability of becoming financially distressed during the Great Depression. Further, leverage affected the performance of 'value' firms more significantly than 'growth' firms. Distress during the Depression is also a function of corporate governance: companies with large boards, and boards dominated by insiders, perform significantly worse during the Depression.; I find that firms with large boards had lower market valuations. Leverage for firms with larger boards was lower before the Depression and higher during the Depression than other firms. I also find that such firms made more real investments during the years in my sample, including the Depression years, which led to poorer long term performance. All the above results are in line with the implications from agency theory suggesting that firms with larger boards did in fact have greater agency problems which justify their lower market valuations.; Finally, I find that managers that lived through the Depression appear to have "learned" to avoid using debt, even after the economic environment improved. Highly levered firms during the Depression used relatively little debt in the 1940s. Moreover, the retirement of the Depression-era company president led to increased use of debt in the 1940s. |
