Credit relationships are sticky. Stickiness makes relationships beneficial to borrowers in times of their own distress but makes them potentially problematic when lenders themselves face hardship. To examine the role of credit relationships during a financial crisis, we exploit a natural experiment in Mississippi during the Great Depression that generated plausibly exogenous differences in financial distress for banks. Using new data drawn from the publications of the credit rating agency Dun & Bradstreet and from original bankruptcy filings, we show that financial distress increased business exit but did not increase the bankruptcy rate. Financial distress caused both banks and trade creditors to recalibrate their collections strategies, which is revealed by changes in the geographical distribution of the creditors of bankrupt businesses.
Hansen, Mary Eschelbach, and Nicolas L. Ziebarth.
"Credit Relationships and Business Bankruptcy during the Great Depression."
American Economic Journal: Macroeconomics,
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: U.S.; Canada: 1913-
Economic History: Financial Markets and Institutions: U.S.; Canada: 1913-
Micro-Business History: U.S.; Canada: 1913-