Why leverage does not always deliver: Lessons from the performance of the top 50 industrial firms in Greece during the Great Depression

Abstract

On the basis of a new data-set constructed from company balance sheets and profit and loss accounts (for 1927–1936), this article examines the performance of the top 50 industrial joint stock companies in Greece that survived the Great Depression. We combined descriptive statistics with panel data analysis, and our main findings are as follows: (1) the Great Depression had a rather mild impact on profitability; (2) the level of (financial or operating) leverage throughout the decade under review was lower than that prescribed in theory, and the best performers within the top 50 had a higher liquidity; (3) leverage did not produce the expected benefits (i.e. a higher capital investment) even when there were increasing industrial profits as in the post-crisis period.

Keywords:

• Great Depression
• large Greek industrial firms
• business leaders
• performance
• debt and operating leverage
• panel data analysis

Acknowledgements

We thank Yannis Agathangelos, Christina Sofianou . Iphigeneia Chatzantonis, Ilias Arvanitakis for research assistance and Alexandra Pel for editorial assistance. For their useful comments, we also thank Aimalia Protogerou and Anna Spadavecchia, as well as the participants of the Economic History Session of the 27th annual EAEPE Conference, Genoa, 17–19 September 2015, and the organisers of the 21 April 2016 Research Seminar of the Accounting and Finance Department at the Athens University of Economics and Business, in particular Efthymios Demirakos and Demetrios Ghicas. Special acknowledgement to Elias Tzavalis, Thanos Sakkas, Kostas Axarloglou, Panos Avramides and Mara Vidali for their advice on the econometric tests and results.

Notes

1. In addition to the above conventional perception, there is mixed evidence about growth opportunities as a determinant of the capital structure of the firm. For a positive relationship, see Chen & Zhao, 2006; Hayat, Ishaq, Raza, & Qureshi, 2010;. For the negative relationship between leverage and growth opportunities, see Bevan & Danbolt, 2000; Myers, 1977; Titman & Wessels, 1988; Raghuram and Zingales (1995) compare the capital structure of G7 countries.

2. For the historical origins of JSCs in Greece, see Angelopoulos (1928). The relevant law (2190 of 1920) that oversaw the corporate sector was incomplete regarding both the structure of balance sheets and the content of their entries. In fact, no unified system for accounting was introduced before 1991 (EEC Directive 91/674).

3. The names of the top 50 firms in order of declining importance in terms of their assets in 1929 were: Greek Company of Chemical Products and Fertilizers SA; Greek Wool Industry SA; Greek Company of Wine and Spirits SA; Greek Electric Power Company SA; Greek Exporting Company of Greek Tobacco SA; Cylinder Mills of Messenia Evangelistria; Brewing and Ice Company Karolos Fix SA; Tekton Building Company SA; General Cement Company SA; BIO General Industrial Company SA; Greek Gas Company of Athens and other Cities SA; Greek Company of Gunpowder and Ammunition SA; Alcohol Company SA; Greek Paper Company SA; Louli’s Cylinder Mill SA; Mills of Saint George; Austrian and Greek Tobacco Company SA; Silk Company Chrisalis St. Papadopoulou; Technical Company D. Kapsabeli and Co. SA; Industrial and Trade Company of Thessaloniki SA; Flour Company Evrotas SA; Greek Industry of Tobacco SA; Graphical Arts Aspioti Elka SA; Portland Cement of Chalkida SA; The Greek Hatmaking Company Ilias Poulopoulos and Son SA; New Greek Sewing Company of Naousa Eria SA; Textile Industry Yfanet SA; Road Construction and Technical Construction Company Ergon SA; Textile Company Retsina Brothers SA; Titan Cement Company SA; Processing Company of Vine Products Andreas P. Kambas SA; Coal Mining Company of Aliveri SA; Ertha Contractor Company of Sea Hydraulic Projects SA; Electric Power Company of Volos SA; Velca Sewing Company SA; Cylinder Mills of Attica; Industrial Company Glavanis SA; Paint Industry SA Economidis and Co. SA; General Technical and Building Company Kadmos SA; Partnership of Industrial Companies Estia SA; Industrial Company of Yarns and Flours of Chalkida SA; Olive Oil Industry of Corfu SA; Textile Company of D. Karella SA; Metal Company Enosis SA; Textile Company of Syros A.K.E.S. SA; Brick Company of Thessaloniki; Chemical Industry SA; Eleftheroudakis Publishing Company SA; National Industry Company Pallas Athina Peireos SA; Penie Textiles Ch. Lanara Bros; Wine and Spirits Company Enosis SA; Industrial Company McAndrews and Forbes SA.

4. For biographical information on the 19 leading businessmen and the top 50 companies, see: Agriantoni, 2002, 2015; Chatzioannou, 1928, Vols B and Z; Chaziotis, 2005; Drandakis, [c. 1927–1934], Vols 9, 13, 20, 21, 24 and Complementary Vol 2; Vovolinis & Vovolinis, 1962.