Financial Dependence and Firm Survival in Interwar Britain

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.