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Did J.P. Morgan's Men Add Value? A Historical Perspective on Financial Capitalism

Listed author(s):
  • J. Bradford De Long

The pre-WWI period saw the heyday of "financial capitalism" in the United States: the concentration of securities issues in the hands of a few investment bankers which had substantial representation on corporate boards of directors. This form of organization had costs: it created a conflict of interest that allowed investment bankers to heavily tax operating corporations. It also had benefits: investment banker representation on boards allowed bankers to monitor the performance of firm managers, quickly replace mangers whose performance was unsatisfactory, and signal to ultimate investors that a company was well managed and fundamentally sound. The presence on one's board of directors of a partner in J.P Morgan and Co. was associated with a rise of perhaps 30 percent in common stock equity value. Some share of the increase in value almost surely arose because investment banker representation on the boards of competing companies aided the formation of oligopoly. But the development of similar institutions in other countries that like the Gilded Age U.S. experienced exceptionally rapid economic growth-Germany and Japan are the most prominent examples-suggests that a substantial share of value added may have arisen because "financial capitalism" improved the functioning of financial markets as social capital allocation mechanisms.

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File URL: http://www.nber.org/papers/w3426.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3426.

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Date of creation: Aug 1990
Publication status: published as "Did J.P. Morgan's Men Add Value? An Economist's Perspective on Financial Capitalism." Peter Temin, editor. Inside the Business Enterprise: Historical Perspectives on the Use of Information. Chicago: The University of Chicago Press, November 1991, pp. 205-249.
Handle: RePEc:nbr:nberwo:3426
Note: ME
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  1. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1990. "Bank Monitoring and Investment: Evidence from the Changing Structure of Japanese Corporate Banking Relationships," NBER Chapters,in: Asymmetric Information, Corporate Finance, and Investment, pages 105-126 National Bureau of Economic Research, Inc.
  2. Takeo Hoshi & Anil K. Kashyap & David Scharfstein, 1989. "Bank monitoring and investment: evidence from the changing structure of Japanese corporate banking relations," Finance and Economics Discussion Series 86, Board of Governors of the Federal Reserve System (U.S.).
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