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Financial Dependence and Firm Survival in Interwar Britain

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  • David Chambers
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    Abstract

    Was the London Stock Exchange (LSE) little more than a Dickensian den of speculation, or did it make a contribution to industrial development in Interwar Britain?� The interwar stock market laboured under problems of weak disclosure, inadequate investor protection and ineffective underwriting.� New manufacturing industries were the most vulnerable to resulting asymmetric information problems.� Drawing on a new database of IPOs on the London Stock Exchange between 1919 and 1938, I conclude that new manufacturing firms were finance-constrained.� Consistent with the Rajan-Zingales financial dependence hypothesis, this result reflects the weak interwar institutional environment.� The disastrous IPO survival rates of the late 1920s provide further evidence of this weak environment.� Yet, when issue activity rebounded strongly in the following decade, a dramatic improvement in survival ensued, due, in part, to the efforts of the LSE.� This was an early example of the "light touch" regulatory approach for which London has subsequently become renowned.

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    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 377.

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    Date of creation: 01 Dec 2007
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    Handle: RePEc:oxf:wpaper:377

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    Keywords: IPOs; Survival; Regulation; Investment;

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    1. Paul A. Gompers & Josh Lerner, 2003. "The Really Long-Run Performance of Initial Public Offerings: The Pre-Nasdaq Evidence," Journal of Finance, American Finance Association, vol. 58(4), pages 1355-1392, 08.
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    3. Julian Franks & Colin Mayer & Stefano Rossi, 2003. "Ownership: Evolution and Regulation," OFRC Working Papers Series 2003fe14, Oxford Financial Research Centre.
    4. David Chambers & Elroy Dimson, 2009. "IPO Underpricing over the Very Long Run," Journal of Finance, American Finance Association, vol. 64(3), pages 1407-1443, 06.
    5. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
    6. David Strömberg, 2004. "Radio's Impact on Public Spending," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 189-221, February.
    7. Katherine Watson, 1996. "Banks and industrial finance: the experience of brewers, 1880-1913," Economic History Review, Economic History Society, vol. 49(1), pages 58-81, 02.
    8. Corbett, Jenny & Jenkinson, Tim, 1997. "How Is Investment Financed? A Study of Germany, Japan, the United Kingdom and the United States," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(0), pages 69-93, Supplemen.
    9. Fama, Eugene F. & French, Kenneth R., 2004. "New lists: Fundamentals and survival rates," Journal of Financial Economics, Elsevier, vol. 73(2), pages 229-269, August.
    10. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-24, January.
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