Papers

Wall Street's First Corporate Governance Crisis: The Panic 1826 (NBER Working Paper 14892.)
In July of 1826, several prominent Wall Street firms abruptly went bankrupt, amid scandalous revelations of fraudulent financial practices by their management. Although mostly forgotten today, these events represented a watershed in the early development of the corporation laws and investor protections governing Wall Street: in the aftermath of the scandals, New York State enacted an extensive package of legislation designed to protect the interests of investors. These statutes were some of the the very first of their kind, and had a lasting influence. This paper analyzes the causes of the failures, and the evolution of the law in response. The analysis highlights the critical role played by scandal-driven legislation in the evolution of investor protections and financial regulations.
 
Rogue Finance: The Life and Fire Insurance Company and the Panic of 1826 (Business History Review, Spring 2009)
In July of 1826, a financial panic on Wall Street caused several companies to fail abruptly and precipitated runs on two of New York City’s fifteen banks. Life and Fire Insurance became the largest of the bankruptcies. In violation of New York’s banking statutes, the firm had engaged in lending on a massive scale during the speculative boom that prevailed in 1824–25. Innovative lending techniques had been developed outside the traditional banking sector—in this case, in the insurance industry. These lending practices, based on an instrument known as a post note, were initially sound, but were later extended to riskier borrowers and ultimately proved ruinous. In the credit crisis that began in late 1825, the value of the Life and Fire’s assets fell dramatically, and in a desperate effort to raise cash, the directors resorted to fraud.
 
The Limited Partnership in New York, 1822-1858: Partnerships without Kinship (Journal of Economic History, forthcoming 2009. Revised version of NBER Working Paper 14412.)
In 1822, New York became the first of many common-law states to authorize the formation of limited partnerships. Little is known about the effects of these statutes. This paper analyzes the use of the limited partnership in nineteenth-century New York City. We find that the form was adopted by a surprising number of firms, and that limited partnerships had more capital, failed at lower rates, and had fewer members with kinship ties, compared to ordinary partnerships. The results suggest that the introduction of the limited partnership facilitated investments that would not have occurred in the absence of the form.
 
When Did Ownership Separate from Control? Corporate Governance in the Early-Nineteeth Century (Journal of Economic History, Vol. 68 no. 3, 2008. Also NBER Working Paper 13093.)
This article analyzes the ownership structures and governance institutions of New York’s corporations in the 1820s, using a new dataset collected from the records of the state’s 1823 capital tax, and from the corporate charters. In contrast to Berle and Means’s account of the development of the corporation, the results indicate that many firms were dominated by large shareholders, who were represented on the firms’ boards, and held sweeping power to utilize the firms’ resources for their own benefit. To address this problem, many firms configured their voting rights in a way that curtailed the power of large investors.
 
The Negative Trade-off Between Risk and Incentives: Evidence from the American Whaling Industry (Explorations in Economic History,Vol. 45 no. 3, 2008. Also NBER Working Paper 11960.)
This paper analyzes the trade-off between risk and incentives in the share contracts of the American whaling industry. Using a newly-collected panel of 5,378 individuals who sailed on whaling voyages from 1855-68, the response of sailors' compensation to an increase in risk is estimated. The risks used to identify this response resulted from the commerce-raiding naval vessels of the Confederacy during the Civil War. As the Confederate cruisers sailed primarily in the Atlantic, and therefore posed far less of a threat to whaling voyages to other oceans, a quasi-experimental approach, focussing on the differences between Atlantic voyages compared to others, is implemented. The results support the existence of a negative trade-off between risk and incentives in the industry's contracts. Moreover, evidence is found of selection among less risk-averse sailors and merchants into riskier voyages during the war.
 
Incentives in Corporations: Evidence from the American Whaling Industry (Journal of Law and Economics, Vol. 49, No. 1, April 2006. Also NBER Working Paper 10403.)
In the 1830s, when whaling was a prosperous American industry, a number of whaling corporations were chartered. All of them were short-lived. This paper analyzes the failure of corporations in American whaling, and argues that the corporate form was unable to create the incentives requisite for success in the industry. Most nineteenth-century whaling ventures were owned by a small number of local investors, and were configured to provide powerful incentives for their managers. The effect of the corporate form on productivity is analyzed using a newly-collected panel dataset of 874 whaling voyages. Many whaling corporations were managed by individuals who had previously (or would subsequently) manage ventures with the usual ownership structure. Using an individual-fixed-effects framework, a strong negative effect of the corporate form on productivity is identified.
 
Investment and Diversification in the American Whaling Industry (Journal of Economic History, Vol. 67, No. 2, June 2007.)
This article analyzes the connection between investment decisions and financing arrangements in the nineteenth-century American whaling industry. Managers of whaling ventures shared their risks by selling some equity claims but retained a substantial portion due to moral hazard considerations. As a result, they had little incentive to consider the covariance between their own returns, and those of others, in planning their voyages. This stifled diversity in whaling voyages and increased industry-wide risk. The analysis suggests a link between financial market development, or the extent of risk sharing in financial markets, and the range of economic activities pursued.