“Fraud and Financial Manias: Estimating the Number of ‘Bubble’ Companies during the Railway Mania of the 1840’s”

Abstract: Financial manias are anecdotally associated with increasing cases of financial fraud, but few studies have successfully measured this quantitatively or addressed the degree to which fraud is a cyclical phenomenon. In this study I employ a novel methodology to estimate the prevalence of fraud and its variance over time in the case of the British Railway Mania of the 1840’s. The Railway Mania provides a striking instance of the role of fraud in manias, as contemporary observers alleged widespread malfeasance stemming from the promotion of hundreds of railway companies in the UK in the years 1844 and 1845. Modern scholars, however, have failed to substantiate these allegations. I resolve this discrepancy by using case studies to reveal why fraudulent companies are likely to be omitted from the samples modern historians have used to analyze the mania. I build a more complete database of railway companies using administrative records, and identify fraudulent companies from court cases. Using the new database of railway companies, and positive instances of known frauds, I estimate the proportion of fraudulent companies in the population. My findings suggest extremely elevated instances of fraud, with as much as 20% to 30% of the population of companies promoted in the 1840’s meeting the criteria for what contemporaries decried as ‘bubble companies’. Moreover, I find the propensity for fraud to be highly procyclical, rising with the increasing railway share prices.

“The Rise of New Corruption: British MPs during the Railway Mania of 1845” with Rui Esteves, CEPR Discussion Paper 12182, July 2017:

Abstract: In the 1840s, speculation in railway shares in the UK prompted the creation of hundreds of new railway companies. Each company needed to petition Parliament for the approval of new railway routes. In this paper, we investigate whether parliamentary regulation of the new railway network was distorted by politicians’ vested interests. Drawing on methods from peer-effects analysis, we identify situations where MPs could have traded votes with specific colleagues in order to get their preferred projects approved (logrolling). We confirm that logrolling was both prevalent and significant. Our estimates suggest that at least a quarter of approved lines received their bills because of logrolling. Companies approved through logrolling also underperformed in the stock market during the railway bubble and after its final crash in 1847.

“The separation of information and lending and the rise of rating agencies in the USA (1841–1907)” with Marc Flandreau, Scandinavian Economic History Review, Vol. 14, No. 2, 2014, pp. 213-242:

Abstract: This paper provides a new interpretation of the early rise of rating agencies in the USA (initially known as ‘mercantile agencies’). We explain this American exceptionality through an inductive approach that revisits the conventional parallel with the UK. In contrast with earlier narratives that have emphasised the role of Common Law and the greater understanding of American judges that would have supported the rise of an ethos of ‘transparency’, we argue that Mercantile Agencies prospered as a remedy to deficient bankruptcy law and weak protection of creditor rights in the USA. The result was to raise the value of the nationwide registry of defaulters which the mercantile agencies managed. This ensured the Agencies’ profitability and endowed them with resources to buy their survival in a legal environment that remained stubbornly hostile.

“The Untold History of Transparency: Mercantile Agencies, the Law and the Lawyers (1851-1916)” with Marc Flandreau, Enterprise & Society, Volume 15, Issue 2, 2014, 213-251:

Abstract: This paper discusses the origins of rating in the second half of the nineteenth century. We review and criticize existing narratives, which—echoing a story told by lawyers favorable to (or employed by) the agencies—have alleged that a cultural shift in normative views, evidenced in an evolution of court decisions, provided legal protection (against libel) to agencies, and permitted the development of printed credit reports. Such a view is inconsistent with evidence from actual judicial decisions and from our exploration of archival material. Looking at both litigated and settled cases, we show that the rise of mercantile agencies in the late nineteenth century was the product of a farsighted corporate strategy applied ruthlessly to a legal system that was still very reluctant to permit the agencies to “commoditize” credit.

“Havas and the Foreign Loan Market, 1889 to 1921”, Centre for Finance and Development, Student Working Paper, No 2, 2013:

Abstract: This paper examines contracts for clandestine financial publicity concluded between the French news agency Agence Havas and assorted sovereign borrowers in the period 1889 to 1921. I explore the reasons for the creation of these contracts, and examine the circumstances surrounding entry into a contract. I argue that the contracts were concluded by sovereign borrowers falling within Havas’ area of international news collection, and that the intent of the contracts was to raise the price at which sovereign borrower’s debt was traded. I present preliminary evidence supporting this hypothesis.