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Government Loan Guarantees and the Failure of the Canadian Northern Railway

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  • Lewis, Frank
  • MacKinnon, Mary

Abstract

The failure of the Canadian Northern Railway is analyzed with a model of optimal capital structure drawn from finance theory. Ex ante bankruptcy probabilities, which are computed on the basis of different assumptions about investors' expectations, range from 40 to 90 percent; and our best estimate is about 70 percent. These high probabilities were a consequence of loan guarantees provided to the Canadian Northern by the federal and provincial governments. The guarantees induced the railway's promoters to undertake an ex ante unprofitable project and to finance that project almost exclusively with debt.

Suggested Citation

  • Lewis, Frank & MacKinnon, Mary, 1987. "Government Loan Guarantees and the Failure of the Canadian Northern Railway," The Journal of Economic History, Cambridge University Press, vol. 47(1), pages 175-196, March.
    • Handle: RePEc:cup:jechis:v:47:y:1987:i:01:p:175-196_04
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    Cited by:

    1. Gillian C. Hamilton & Ian Keay & Frank D. Lewis, 2017. "Contributions to Canadian economic history: The last 30 years," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1632-1657, December.
    2. Olivier Debande, 1997. "Le rôle du secteur privé dans le financement des infrastructures : une mise en perspective historique," Revue Économique, Programme National Persée, vol. 48(2), pages 197-230.

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