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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)
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Abstract

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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 , First View , pp. 1 - 48
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.

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