Mary O’Sullivan’s book – Dividends of Development: Securities Markets in the History of US Capitalism 1866-1922 - published by OUP in September 2016 had still not, as far as I could tell, received any reviews (even online) a year later. Mary has always adopted somewhat renegade perspectives, which flummox specialists in the subject, but for which she marshals strong evidence. Her view is that in the post-bellum era the NYSE market for industrials (as opposed to railroads) developed later than at least one European rival and only really took off from 1917 onwards (a take-off forged by the war and its consequences). This is not easily reconciled with the work of many financial economists (other than Rajan and Zingales) or financial, corporate and legal historians (other than Baskin and Miranti) on pre-1914 US finance. Most argue that private order institutions - such as investment banks and self-regulating exchanges - fostered US precocity in developing securities markets, which Mary alleges “involves imagining them as they never were.”
My mainly descriptive paper offers fuller statistical evidence that Mary’s perspectives are plausible. It also supports some broader implications of her work for the rapidly burgeoning corpus of historical financial economics. Two that she herself outlines in her conclusion are:
1. Business historians should guide financial economists to understanding markets as they existed in the past, rather than Whiggishly ascribing to them characteristics of their very different descendant institutions of today.
2. Economic developments drove securities markets as much as vice-versa, and the companies that raised money on securities markets were often the least successful ones.
I derive two further points for historical financial economics:
3. Studies of historical rates of return or the equity premium are essentially based on NYSE securities, which before 1914 accounted for only around a quarter by value of US non-rail traded securities. The NYSE excluded companies among America’s largest such as - even in the rail sector - the Pennsylvania Railroad before 1900 or Standard Oil before 1920. Historical NYSE indexes should not be interpreted as representing the experience of typical US investors: they are not comparable to today’s combined NYSE/NASDAQ indexes such as the widely-used CRSP database.
4. Mary sees the exceptional volatility of the NYSE as driven by the call market and institutional investments. Because NYSE-listed companies were also more leveraged than the average US company, their bankruptcy risks and volatility – other things equal – were greater than for European companies or for many American companies with common stock listed on the curb or regional markets. The latter long included many prominent corporations like Standard Oil, Singer Manufacturing, Du Pont, Eastman Kodak and Procter & Gamble, with reliable dividends and growing earnings. Claims that NYSE-vetted securities were “safe” (such as those made by the legal historian John Coffee) should be viewed with skepticism: historically 5% or more of NYSE-listed securities by value were in receivership, a higher portion than for domestic securities on major European exchanges. US corporate governance around 1900 was substantially by bondholders, not (as at the time in Europe or today in the US) stockholders.