Papers

Wall Street's First Corporate Governance Crisis: The Conspiracy Trials of 1826 (preliminary draft)

In July of 1826, several prominent Wall Street firms abruptly went bankrupt, amid scandalous revelations of fraudulent financial practices by their management. The directors of many of these companies, mostly insurance firms, were indicted by the District Attorney of New York for criminal conspiracy, and their subsequent trials captivated the attention of the city for months. 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. This paper analyzes the fraudulent practices of the firms that failed, and the evolution of the law in response. The analysis highlights the critical role played by scandal-driven legislation in developing effective investor protections, and improving the governance institutions of corporations.

When Did Ownership Separate from Control? Corporate Governance in the Early-Nineteeth Century (in submission, released as NBER Working Paper 13093)

This paper analyzes the ownership and governance of the business corporations of New York State in the 1820s. Using a new dataset collected from the manuscript records of New York's 1823 capital tax, and from the charters of the corporations, I analyze the ownership structures of the firms, and investigate the degree to which ownership was separated from control at the time. In contrast to Berle and Means's account of the development of the corporation, the results indicate that many of the 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. The oppression of minority shareholders was a significant problem in early corporate governance, and many of the firms configured their voting rights in a way that curtailed the power of large investors. A positive relationship between firm value and these voting rights configurations is found among the publicly-traded firms in the sample.

The Negative Trade-off Between Risk and Incentives: Evidence from the American Whaling Industry (in submission, released as 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. Previously released as 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.