Asset bubbles are an important aspect of business history, as they have the potential to significantly disrupt financial markets and impact negatively on the growth of an economy. They impact investor behaviour, and have implications for the financing and ownership of firms. This paper revisits one of the most famous financial bubbles, the South Sea Bubble of 1720, to examine investor behaviour during and after the IPO of the newly-formed London Assurance Company.
With limited investor information on the South Sea Company surviving from this period, much of the investigation into the characteristics and trading behaviour of investors during the episode has focused on companies that played a secondary role in the bubble, such as the Bank of England. The London Assurance Company, however, experienced a more dramatic ‘bubble’ than any other firm on the market at that time, including the South Sea Company itself. Researching the characteristics and behaviour of London Assurance investors at this time therefore has the potential to offer considerable insight into the mania of 1720.
Using a new hand-collected dataset, we examine the trading behaviour of London Assurance investors from its IPO in 1719 onwards, reaching four conclusions. Firstly, the majority of the original subscribers in the company sold their stock before the height of the bubble. However, a distinct group of investors with longer investment horizons did exist amongst the original subscribers. Secondly, individuals who acquired stock during the bubble typically had shorter investment horizons than those who bought stock during subsequent ‘normal’ market conditions. Thirdly, there is evidence that the behaviour of investors was impacted by the restrictive nature of trading non-divisible subscription receipts. Finally, a comparison with the Bank of England suggests that share turnover and investor churn was higher in companies that experienced a greater bubble.