Economic Effects of Runs on Early ‘Shadow Banks’: Trust Companies and the Impact of the Panic of 1907

56 Pages Posted: 29 Jul 2012

See all articles by Carola Frydman

Carola Frydman

Northwestern University; National Bureau of Economic Research (NBER)

Eric Hilt

National Bureau of Economic Research (NBER); Wellesley College

Lily Zhou

Federal Reserve Bank of New York; Sciences Po, Students

Date Written: July 25, 2012

Abstract

We use the unique circumstances that led to the Panic of 1907 to analyze its consequences for non-financial corporations. The onset of the panic occurred following a series of scandalous revelations about the investments of prominent financiers, which triggered widespread runs on trust companies associated with those men. Using newly collected data, we find that corporations with close ties to the trust companies that faced severe runs experienced an immediate decline in their stock price, and performed worse in the years following the panic: they earned fewer profits and paid fewer dividends, and faced higher interest rates on their debt. Consistent with the notion that information asymmetries aggravated the consequences of the contraction of credit intermediation, these effects were largest for smaller firms and for industrials, whose collateral was more difficult to value than that of railroads.

Keywords: financial crisis, panic of 1907, shadow banks, credit intermediation, bank runs, trust

JEL Classification: E44, G01, G21, N11, N21, N81

Suggested Citation

Frydman, Carola and Hilt, Eric and Zhou, Lily, Economic Effects of Runs on Early ‘Shadow Banks’: Trust Companies and the Impact of the Panic of 1907 (July 25, 2012). Available at SSRN: https://ssrn.com/abstract=2117552 or http://dx.doi.org/10.2139/ssrn.2117552

Carola Frydman (Contact Author)

Northwestern University ( email )

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Room 4383
Evanston, IL 60208
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National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Eric Hilt

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Wellesley College ( email )

106 Central St.
Wellesley, MA 02181
United States

HOME PAGE: http://www.erichilt.net

Lily Zhou

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Sciences Po, Students ( email )

28 Rue des Saint-Peres
Paris, Paris 75006
France

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