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

We study the effects of a contraction in financial intermediation on nonfinancial firms. The Panic of 1907 originated in the shadow banks of the time, New York's trust companies. The runs were caused by a shock unrelated to the trust companies' nonfinancial corporate clients. In the years following the panic, corporations affiliated with the worst-affected trusts made fewer capital investments, paid lower dividends, and suffered lower profitability and higher borrowing costs relative to firms without such connections. The shock to New York's trust companies accounted for at least 18.4 percent of the decline in corporate investment in the United States in 1908.