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Going public in interwar Britain1

  • David Chambers (a1)

Utilising a new sample of interwar initial public offerings (IPOs), I consider the effectiveness of the interwar stock market for firms going public. Consistent with the pecking order theory, IPO proceeds contributed only modestly to domestic industry's capital expenditure needs. IPOs of capital-hungry new manufacturing industries raised no more finance than did the rest of manufacturing. This was in part attributable to the detrimental effect of weak financial regulation on investor appetite for newer, riskier enterprises. In terms of the quality of firms allowed onto the market, IPO survival rates of the early and late 1920s were shockingly low, just as earlier research has shown. However, survival rates rebounded strongly in the following decade due not only to the economic recovery but also to tougher scrutiny of listing applications by the London Stock Exchange.

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2 Cottrell, P., Industrial Finance 1830–1914: The Finance and Organization of Manufacturing Industry (London, 1980).

3 Collins, M. and Baker, M., ‘British commercial bank support for the business sector and the pressure for change, 1918–39’, in Kasuya, M. (ed.), Coping with Crisis: International Financial Institutions in the Interwar Period (Oxford, 2003); Capie, F. and Collins, M., ‘Banks, industry, and finance, 1880–1914’, Business History, 41 (1999), pp. 3762. D. M. Ross is a dissenting voice, claiming that only very unattractive marginal borrowers were denied finance. See Ross, D. M., ‘Commercial banking in a market-orientated financial system: Britain between the wars’, Economic History Review, 49 (1996), pp. 314–35. P. Scott and L. Newton provide a good summary of the debate, albeit coming firmly down on the side of banks acting as monopolists and restricting the supply of credit, especially to small firms. See Scott, P. and Newton, L., ‘Jealous monopolists? British banks and the response to the Macmillan gap’, Enterprise and Society, 8 (2007), pp. 882–93.

4 Harris, R. A., ‘A re-analysis of the 1928 new issue boom’, Economic Journal, 43 (1933).

5 Davies, P. N. and Bourn, A. M., ‘Lord Kylsant and the Royal Mail’, Business History, 14 (1972).

6 Thomas, W. A., The Finance of British Industry, 1918–1976 (London, 1978), p. 34; Michie, R. C., The London Stock Exchange: A History (Oxford, 1999), pp. 285–6.

7 Rajan, R. G. and Zingales, L., ‘Financial dependence and growth’, American Economic Review, 88 (1998).

8 Neal, L. and Davis, L., ‘The evolution of the structure and performance of the London Stock Exchange in the first global financial market, 1812–1914’, European Review of Economic History, 10 (2006).

9 This is a theme which runs through Michie, London Stock Exchange; see, for example, pp. 96–7.

10 See Chambers, D. and Dimson, E., ‘IPO underpricing over the very long-run’, Journal of Finance, 64 (2009), for a discussion of this institutional environment in the long-run context of the twentieth century.

11 A 1931 government investigation into the Royal Mail Steam Packet Company revealed falsification of financial statements disclosed in its prospectuses published in the late 1920s, which led to the imprisonment of the chairman, Lord Kylsant. See Davies, P. N. and Bourn, A. M., ‘Lord Kylsant and the Royal Mail’, Business History, 14 (1972).

12 Arnold, A. J. and Matthews, D. R., ‘Corporate financial disclosures in the UK, 1920–50: the effects of legislative change and managerial discretion’, Accounting and Business Research, 32 (2002).

13 Franks, J. R., Mayer, C. and Rossi, S., ‘Ownership: evolution and regulation’, Review of Financial Studies, 22 (2009).

14 Macmillan, H., Report of the Committee on Finance and Industry, Cmnd. 3897 (London, 1931), Minutes of Evidence, Q.1308.

15 Chambers and Dimson, ‘IPO underpricing’.

16 For example, Leadenhall Securities was established by J. Henry Schroder in 1935. See Roberts, R., Schroders: Merchants and Bankers (Basingstoke, 1992), p.101.

17 Chambers, D., ‘Gentlemanly capitalism revisited: a case study of IPO underpricing on the London Stock Exchange, 1946–1986’, Economic History Review, 62 (2009).

18 King, W. T. C., The Stock Exchange (London, 1947), pp. 75–6.

19 ‘The results of the 1928 new issue boom’, Economic Journal, 41 (1931); Harris, ‘1928 new issue boom’.

20 Mowery, D. C. and Rosenberg, N., Technology and the Pursuit of Economic Growth (Cambridge, 1989), p. 8.

21 Stromberg, D., ‘Radio's impact on public spending’, Quarterly Journal of Economics, 119 (2004).

22 Mowery and Rosenberg, Technology; Edgerton, D. and Horrocks, S., ‘British industrial research and development before 1945’, Economic History Review, 47 (1994).

23 O'Sullivan, M. (2009), ‘Funding new industries: a historical perspective in the financing role of the US stock market in the twentieth’, in Lamoreaux, N. R. and Sokoloff, K. L. (eds.), Financing Innovation in the United States: 1870 to the Present (Cambridge, MA, 2009).

24 Matthews, R. C. O., Feinstein, C. H. and Odling-Smee, J. C., British Economic Growth: 1856–1973 (Oxford, 1982), p. 257, table 9.2. This estimate ignores any spillover effects on the growth in output of other parts of the economy.

25 Aldcroft, D., The Interwar Economy: Britain 1919–1930 (London, 1970); Richardson, H. W., Economic Recovery in Britain 1932–39 (London, 1967).

26 Dowie, J. A., ‘Growth in the interwar period: some more arithmetic’, Economic History Review, 21 (1968). S. N. Broadberry showed there was little evidence of dispersion in output growth across industries in the period 1924–37. See Broadberry, S. N., The British Economy between the Wars: A Macroeconomic Survey (Oxford, 1986), pp. 10, table 1.4. S. N. Broadberry and N. F. R. Crafts examined the failure of British manufacturing productivity levels to match those of the United States. See Broadberry, S. N. and Crafts, N. F. R., ‘Britain's productivity gap in the 1930 s: some neglected factors’, Journal of Economic History, 52 (1992).

27 Feinstein, C., Domestic Capital Formation in the UK 1920–38 (Cambridge, 1965), p. 45, table 3.33.

28 Lewchuk, W., ‘The return to capital in the British motor vehicle industry, 1896–1939’, Business History, 27 (1985).

29 The literature has followed a similar path in the US. Eddy, G. A., ‘Security issues and real investment in 1929’, Review of Economic Statistics, 19 (1937), dealt with the 1929 security issues in detail, and O'Sullivan, ‘Funding new industries’, analysed the automobile, aircraft, and radio industries in the period up to 1930.

30 Edelstein, M., Overseas Investment in the Age of High Imperialism: The United Kingdom, 1850–1914 (New York, 1982)

31 In line with previous IPO studies, issues by firms already listed on another stock exchange, investment trusts, and introductions are excluded. Penny shares, or shares with an offer price of 2 shillings or less, are also excluded. Such issues were characteristic of speculative mining and rubber share counters. The Economist, 25 Jan. 1930, p. 180; Thomas, Finance of British Industry, p. 37.

32 After their merger in 1932 they became the Stock Exchange Official Year Book.

33 Michie, London Stock Exchange, p. 284; ‘Company meetings: Ford Motor Company’, The Times, 19 March 1931, p. 21.

34 Scott, P., ‘Towards the “cult of the equity”’? Insurance companies and the British capital market 1919–39', Economic History Review, 55 (2002).

35 The Midland Bank Review estimated total new issue proceeds at £1,700 m. The difference is represented by SEO proceeds, which for reasons discussed above, I am unable to include in this sample.

36 The Economist index of business activity fell by 35% between July 1920 and June 1921. The fact that the share price index did not show a similar sharp fall at this time reflects the lack of a pure ordinary share index series prior to the establishment of the Financial News 30 index in January 1930.

37 There were only 38 common stock IPOs between 1934 and 1938. Gompers, P. and Lerner, J., ‘The really long-run performance of initial public offerings: the pre-Nasdaq evidence’, Journal of Finance, 58 (2003), p. 1360, table 1.

38 Any securities issued but not quoted are valued at par.

39 Mowery and Rosenberg, Technology, ch. 4 and tables 4.2 to 4.5. Research intensity is defined as number of scientific personnel per 1,000 wage earners.

40 As a further check, I made use of prospectus disclosure regarding whether a firm engaged in research and development activity. There were only 49 such firms in the sample, but these firms were highly correlated with the new manufacturing industrial classification.

41 I am grateful to Mike Staunton for providing this data.

42 The Companies Acts of 1900 and 1907 required public companies to publish a balance sheet. However, many companies only converted to public company status immediately prior to their IPO, and, therefore, would have escaped this requirement at IPO.

43 See Henderson, R. F., The New Issue Market and The Finance of Industry (London, 1951), ch. 3 and especially appendix A for a comparison of the three series.

44 This approach follows Henderson, New Issue Market, in excluding long-term, but not short-term, debt repayment. Bank overdrafts represent short-term funding of capital expenditure in anticipation of the subsequent equity issue. However, overdrafts used to fund an acquisition are excluded.

45 Macmillan, H., Report of the Committee on Finance and Industry, Cmnd. 3897 (London, 1931), para. 404.

46 Cairncross, A. K., Home and Foreign Investment 1870–1913 (Cambridge, 1953), p. 96.

47 Midland Bank Review, January 1930 and January 1939.

48 Henderson, New Issue Market, p. 35, table 4, and p. 37, table 6. In comparison, he estimated only 20% and 32% respectively of IPO proceeds to new money.

49 Tew, B. and Henderson, R. F., Studies in Company Finance (Cambridge, 1959), p. 75, table 5.11.

50 J. Corbett and T. Jenkinson analysed non-financial firms between 1970 and 1994, and reported similar results for the US. Their data are sourced from national income accounts, which prevents any attempt at comparing financing across industries. See Corbett, J. and Jenkinson, T., ‘How is investment financed? A study of Germany, Japan, the United Kingdom and the United States?’, Manchester School, 65 (1997).

51 New money raised by the motor vehicle industry, includes aircraft IPOs since some firms, particularly parts manufacturing firms, participated in both markets.

52 Kennedy, W., Industrial Structure, Capital Markets, and the Origins of British Industrial Decline (Cambridge, 1987).

53 ‘The new issues market of 1928’, Economic Journal (December 1931). The sample included SEOs as well as IPOs.

54 Andrews, P. W. S., ‘Post-war public companies: a study in investment and enterprise’, Economic Journal, 187 (1937).

55 Nevin, E., The Mechanism of Cheap Money: A Study of British Monetary Policy, 1931–1939 (Cardiff, 1955); Eichengreen, B., ‘The British economy between the wars’, in Floud, R. and Johnson, P. (eds.), The Cambridge Economic History of Modern Britain, vol. II: Economic Maturity, 1860–1939 (Cambridge, 2004), pp. 333–5.

56 Mitchell, B. R., British Historical Statistics (Cambridge, 1988), p. 836, National Accounts Table 5A, Compromise Estimate of GDP at Factor Cost in constant price for the UK excluding Southern Ireland.

57 Capie and Collins, ‘Banks, industry, and finance, 1880–1914’, table 3.1.

58 Capie, F., ‘The British tariff and industrial protection in the 1930's’, Economic History Review, 31 (1978).

60 Richardson, Economic Recovery, p. 246.

61 For example, Eichengreen, ‘British economy’, pp. 339–40.

62 H. Mercer, ‘The evolution of government policy towards competition in private industry, 1940–1956’, unpublished PhD thesis (LSE, 1989), p. 91, table 4.

63 Broadberry and Crafts, ‘Britain's productivity gap’.

64 Kinross, J., Fifty Years in the City: Financing Small Business (London, 1982).

65 Samuel, H. B., Shareholders' Money: An Analysis of Certain Defects in Company Legislation with Proposals for Their Reform (London, 1933), pp. 64–6.

66 Macmillan, H., Report of the Committee on Finance and Industry, Cmnd. 3897 (London, 1931).

67 ‘The Stock Exchange committee and the investor’, The Economist, 16 Aug. 1930, pp. 323–4. See also Michie, London Stock Exchange, p. 266, footnotes 82 and 83.

68 Guildhall Library Archives: LSE, Minutes Committee for General Purposes, 6 January 1936 and 9 March 1936 (MS29760/02–18).

69 Applications were either rejected outright or postponed until publication of the first set of accounts.

70 There is no record of the total number of applications which would be a more appropriate denominator for estimating a rejection rate.

71 Rule 159 App. 34 Sch. II Pt. A.

72 Michie, London Stock Exchange, p. 416.

73 Chambers and Dimson, ‘IPO underpricing’.

74 In all, 128 start-ups went public between 1919 and 1938. I have excluded the 10 property development start-ups launched in the late 1950s and early 1960s.

1 I am grateful for suggestions from Forest Capie, Nick Crafts, Leslie Hannah, Peter Scott, two anonymous referees and participants at the 2007 Economic History Society Annual Conference, the European Historical Economics Society (Lund), the International Conference on Business History (Waseda), and seminars at the University of Oxford and the Bank of England.

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