Article

An Incomplete Revolution: Corporate Governance Challenges of the London Assurance Company and the Limitations of the Joint-Stock Form, 1720–1725

Authors:
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

The London Assurance (LA) was incorporated in 1720, marking a significant innovation in the marine insurance industry. Contemporaries anticipated joint-stock firms such as the LA would rapidly outcompete private underwriters, yet this outcome did not occur. The success of the private underwriters has been ascribed to their organizational form. This paper reassesses these explanations and finds that, rather than an a priori worse business model, various corporate governance challenges limited the LA’s capacity to compete. This provides a more complete explanation for the relative failure of the joint-stock marine insurance companies and has implications for understanding the evolution of the corporate form in the eighteenth century.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... (e) Voting right: Ordinary shareholders vote on the members of the board of directors after the election of the board of directors at the general meeting, as well as voting on any change in the company law, which may include a license to issue new shares. (f) Share trading is regarded as a real benchmark for the joint-stock company since, without it, the joint-stock business loses the status for which it was founded as a joint-stock company (Aldous, & Condorelli, 2020). ...
Article
Full-text available
Purpose –For many international organizations, the phenomenon of variation has become a basis in the pricing of common stocks, as it has witnessed great developments over the past years because of the technological, economic, and health developments that have recently taken place in the world. Based on the integrated database of some Iraqi companies listed on the Iraqi Stock Exchange, a study aims to analysestock price trends using the financial and technical tools of different sectors operating in Iraq.Methodology/approach –An analytical cognitive framework for the nature of these trends and their impact on the pricing of common stocks has been found by identifying the best analysis index that serves Iraqi securities investors and compressing the risks resulting from that investment to the maximum extent. This is done by relying on the Momentum Index. In addition to the analysis of the reciprocal relationship between the two study variables for the period from 2018–2020, using the test of the relationship between the variablesand statistically and quantitatively analysingthem, the study problem was interpreted.Findings –The major conclusion in this study is the ability Momentum Index to determine investors’ views on the fair price of shares. In addition, the study concludeda set of recommendations; the most important one is adopting the Momentum Index for its ability to predict the direction of the stock prices of companies and its ability to show the signals of selling and buying the shares of those companies, which positively reflects on the stock returns.Novelty/value –This study highlights the unique role of the momentum index in technical analysis and stock pricing, offering fresh insights to improve investment strategies.
Article
As articulated by Adam Smith, one of the central issues facing companies is that managers will not run the business in the interests of its owners and will misuse resources. This ultimately has a detrimental consequence for the wealth of the nation. This survey reviews the nature and evolution of the corporate governance of UK public companies over the past 300 years. It makes two principal arguments. First, because the separation of ownership and control was one of the rationales for the introduction of the corporate form, we should not be surprised that corporate ownership has generally been diffuse. Second, over time, the way in which owners ensure that managers act in their interests has gradually changed from a system in which shareholders monitored and exercised voice to one where there was more reliance on external forces and exiting ownership.
Chapter
The alleged failings of contemporary marine insurance were cited in the opening article of the Bubble Act of 1720 as the reason why its passage was necessary. The act declared that, by granting exclusive charters to two new London corporations to underwrite ships and their cargoes on a joint-stock basis, this would provide a prophylactic against the ruin of overseas merchants and investors by the bankruptcy of their insurers. Consequently, insurance found itself at the epicentre of the rumblings about organisational choice and state controls over the promotion of stock companies that dogged the corporate economy of Britain through the eighteenth and early nineteenth centuries. This chapter examines, first, the role of the two groups of insurance investors in the passage of the Bubble Act, and, second, the act’s subsequent impact on company formation in insurance through to its repeal in 1825. It is argued that the nature of the business facilitated its organisational flexibility and that this enabled the insurance industry to become a pioneer of Britain’s nascent corporate economy.
Article
The London Assurance Company (LA), which incorporated during the bubble of 1720, experienced more dramatic price movements in its shares than the South Sea Company. This paper examines how incorporating during the bubble affected its long run performance. We show that the bubble in the Company's share price was partly attributable to changes in market structure during the share issuance process. As a result of the bubble, the Company's original subscribers, who had been curated for expertise and political connections, overwhelmingly exited during 1720 and were replaced by unsuccessful speculators. Analysis of LA shareholder behaviour up to 1737 suggests that this loss of shareholder expertise had detrimental consequences for the Company's performance. These results demonstrate how a bubble in the shares of a newly created company can lead to an exodus of value‐adding investors, damaging the company's long‐term prospects.
Article
Full-text available
For the body of work known as the law and finance literature, the development of financial markets and the concentration of ownership across countries is to a large extent the consequence of the legal system nations created or inherited decades or hundreds of years ago. Despite the seemingly historical nature of this explanation, most of the body of work supporting the law and finance hypothesis has been ahistorical. This paper summarises the business history literature and provides evidence on investor protection and financial development over the long run that challenges the main tenets of the law and finance literature.
Article
Full-text available
With their legal personhood, permanent capital with transferable shares, separation of ownership and management, and limited liability for both shareholders and managers, the Dutch East India Company (VOC) and subsequently the English East India Company (EIC) are generally considered a major institutional breakthrough. Our analysis of the business operations and notably the financial policy of the VOC during the company’s first two decades in existence shows that its corporate form owed less to foresight than to constant piecemeal engineering to remedy original design flaws brought to light by prolonged exposure to the strains of the Asian trade. Moreover, the crucial feature of limited liability for managers was not, as previously thought, part and parcel of that design, but emerged only after a long period of experimenting with various, sometimes very ingenious, solutions to the company’s financial bottlenecks.
Article
Full-text available
Real estate data are often characterized by data irregularities: missing data, censoring or truncation, measurement error, etc. Practitioners often discard missing- or censored-data cases and ignore measurement error. We argue here that an attractive remedy for these irregularity problems is simulation-based model fitting using the Gibbs sampler. The style of the paper is primarily pedagogic, employing a simple illustration to convey the essential ideas, unobscured by implementation complications. Focusing on the missing-data problem, we show dramatic improvement in inference by retaining rather than deleting cases of partially observed data. We also detail Gibbs-sampler usage for other data problems. Copyright American Real Estate and Urban Economics Association.
Article
This article challenges the idea that the corporation is a globally superior form of business organization and that the Anglo-American common-law is more conducive to economic development than the code-based legal systems characteristic of continental Europe. Although the corporation had important advantages over the main alternative form of organization (partnerships), it also had disadvantages that limited its appeal to small- and medium-sized enterprises (SMEs). As a result, when businesses were provided with an intermediate choice, the private limited liability company (PLLC) that combined the advantages of legal personhood and joint stock with a flexible internal organizational structure, most chose not to organize as corporations. This article tracks the changes that occurred in the menu of business organizational forms in two common-law countries (the United Kingdom and the United States) and two countries governed by legal codes (France and Germany) and presents data showing the rapidity with which firms in each country responded to enabling legislation for PLLCs. We show that the PLLC was introduced first and most easily in a code country (Germany) and last and with the most difficulty in a commonlaw country (the United States). Late introduction was associated with prolonged use of the partnership form, suggesting that the disadvantages of corporations did indeed weigh heavily on SMEs.
Book
This collection of essays on seventeenth-century Virginia, the first such collection on the Chesapeake in nearly twenty-five years, highlights emerging directions in scholarship and helps set a new agenda for research in the next decade and beyond. The contributors represent some of the best of a younger generation of scholars who are building on, but also criticizing and moving beyond, the work of the so-called Chesapeake School of social history that dominated the historiography of the region in the 1970s and 1980s. Employing a variety of methodologies, analytical strategies, and types of evidence, these essays explore a wide range of topics and offer a fresh look at the early religious, political, economic, social, and intellectual life of the colony. © 2011 by the Rector and Visitors of the University of Virginia. All rights reserved.
Article
Financial capitalism emerged in a recognisably modern form in late seventeenth- and eighteenth-century Great Britain. Following the seminal work of Douglass C. North and Barry R. Weingast (1989), many scholars have concluded that the 'credible commitment' that was provided by parliamentary backing of government as a result of the Glorious Revolution of 1688 provided the key institutional underpinning on which modern public finances depend. In this book, a specially commissioned group of historians and economists examine and challenge the North and Weingast thesis to show that multiple commitment mechanisms were necessary to convince public creditors that sovereign debt constituted a relatively accessible, safe and liquid investment vehicle. Questioning Credible Commitment provides academics and practitioners with a broader understanding of the origins of financial capitalism, and, with its focus on theoretical and policy frameworks, shows the significance of the debate to current macroeconomic policy making.
Article
This volume is the first detailed study of what happened in Britain when the East India Company acquired a vast territorial empire in South Asia. Drawing on a mass of hitherto unused material contained in the Company’s administrative and financial records, the book offers a reconstruction of the inner workings of the Company as it made the remarkable transition from business to empire during the late-eighteenth century. Huw Bowen profiles the company’s stock holders and directors and examines how those in London adapted their methods, working practices, and policies to changing circumstances in India.
Article
The dramatic expansion of public and private financial markets in the aftermath of the Glorious Revolution has received extensive attention. Despite this, little is known about how ordinary individual investors managed risk within this framework. Using a newly constructed dataset of share ownership for those joint-stock companies listed in the financial press of the day, we reconstruct individual portfolio holdings for investors in these companies. We examine individual portfolio holdings first for the decade after the Glorious Revolution and then for the years around the South Sea Bubble. Despite a fivefold increase in the number of unique individuals in the market between the 1690s and the 1720s, we find that in each period roughly 80 per cent of those active in the equity market held shares in only one company, even though many shareholders had the capacity or wealth to diversify share portfolios. These outcomes suggest diversification against idiosyncratic liquidity risk. Overall, however, there is limited evidence that individuals were using their financial portfolios to protect against diversifiable shocks. For many, we argue, company-specific voting and firm governance rules drove market activity.
Article
In the late eighteenth century, northern Virginia's grain-based slave economy prompted a thriving but risky overseas trade. The merchants who conducted this trade sought to manage their risks by purchasing marine insurance, initially from British and northern U.S. sources. After the American Revolution, however, the expense and inconvenience of obtaining insurance abroad prompted merchants to create local institutions modeled on northern practices. Most notably, in 1797 Alexandria merchants established the Alexandria Marine Insurance Company, an incorporated entity that helped manage the risks of overseas trade during the dangerous Napoleonic Wars, enlarged local sources of capital, and, in turn, played a significant role in stimulating regional economic development. The appearance of this marine insurance company (and others like it) reveals the significant role that financial intermediaries played in the development of the southern slave economies in the early republic.
Article
Much remains unknown about the political dimensions of business during the classic period of the British industrial revolution, c.1770‐1850. This article focuses upon one aspect of those politics, namely the internal relations between company directors, managers and shareholders. Its object is to search for ‘shareholder democracy’ in action, through a study of the governance of stock companies in the insurance industry, based upon the surviving records of nearly 50 firms. Before the 1830s this was the leading sector in the economy for the unchartered joint‐stock partnership, one of the most common and problematic forms of stock company organisation in Britain before the railway age. The scale of these enterprises, with their large shareholder base and extensive marketing operations, helped sharpen the principal agent issues which Adam Smith regarded as endemic problems in joint‐stock organisations. The first section of the article examines the scale of joint‐stock enterprise during the first industrial revolution – for its extent and importance have traditionally been questioned – and the legal and institutional context within which it developed. The second section presents evidence from the insurance sample which suggests that the history of ‘participatory shareholder democracy’ remained difficult and contested throughout this period.
Article
Introduction 1. The legal framework Part I. Before 1720: 2. The pre-1720 business corporation 3. The Bubble Act, its passage and its effects Part II. 1721-1810: 4. Two distinct paths of organizational development: transport and insurance 5. The joint-stock business corporation 6. Trusts, partnerships, and the unincorporated company 7. The progress of the joint-stock organization Part III. 1800-44: 8. The attitudes of the business community 9. The joint-stock company in court 10. The joint-stock company in parliament.
Article
Limited liability is regarded as the sine qua non of the modern company, enabling firms to raise capital from a broad spectrum of investors who have well-diversified portfolios. This article uses the ownership records of an Irish bank, which converted to limited liability in 1883, to explore the impact of introducing limited liability upon ownership and control. We find that ownership becomes more dispersed amongst individuals from a broader social and geographical spectrum. However, there appears to be little impact on portfolio diversification. Furthermore, although limited liability appears to contribute to the rise of the professional director, the evidence suggests that managerial incentives may have been weakened.
Article
The series of events in 1720 called the Mississippi Bubble, South Sea Bubble and the Dutch Windhandel represent the first and by some measures the largest global financial bubble in history. Stock prices of more than 50 companies rose by 100% to 800% in less than a year and then lost nearly all of their gains within two months. The question is: why? In this paper we hand-collect new, high-frequency, cross-sectional data from 1720 to test theories about market bubbles. Our tests suggest that innovation was a key driver of bubble expectations. We present evidence in contrast with the currently prevailing debt-for-equity conversion hypothesis and relate stock returns to innovations in Atlantic trade and insurance. We find evidence consistent with the innovation-driven bubble dynamics documented by Pastor and Veronesi’s (2009) for new economy stocks. Using detailed transactions data for one major bubble company in the Netherlands we also test recent clientele-based theories about bubbles. In contrast to results for the recent tech bubble, we find no evidence that the trades of either insiders or arbitrageurs were coordinated or that they triggered the Dutch 1720 crash. We also show little evidence of arbitrageurs liquidating their positions shortly after the price collapse.
Article
This essay uses ideas drawn from institutional and evolutionary economics to explore three different approaches to the organisation of insurance operations in Britain since the eighteenth century: the market-based approach used by Lloyd's; the hierarchical approach developed by insurance companies from the nineteenth century; and the 'direct' approach introduced in the last few years. It argues that these ideas open up the 'black box' of internal operation to economic analysis and relate these to broader strategic change in the business, thus providing a better understanding of its long-term developments by showing how technological innovations have resolved previously intractable difficulties that have channelled the direction of organisational change.
Book
This is the long-awaited second edition of this highly regarded comparative overview of corporate law. This edition has been comprehensively updated to reflect profound changes in corporate law. It now includes consideration of additional matters such as the highly topical issue of enforcement in corporate law, and explores the continued convergence of corporate law across jurisdictions. The authors start from the premise that corporate (or company) law across jurisdictions addresses the same three basic agency problems: (1) the opportunism of managers vis-a-vis shareholders; (2) the opportunism of controlling shareholders vis-a-vis minority shareholders; and (3) the opportunism of shareholders as a class vis-a-vis other corporate constituencies, such as corporate creditors and employees. Every jurisdiction must address these problems in a variety of contexts, framed by the corporation's internal dynamics and its interactions with the product, labor, capital, and takeover markets. The authors' central claim, however, is that corporate (or company) forms are fundamentally similar and that, to a surprising degree, jurisdictions pick from among the same handful of legal strategies to address the three basic agency issues. This book explains in detail how (and why) the principal European jurisdictions, Japan, and the United States sometimes select identical legal strategies to address a given corporate law problem, and sometimes make divergent choices. After an introductory discussion of agency issues and legal strategies, the book addresses the basic governance structure of the corporation, including the powers of the board of directors and the shareholders meeting. It proceeds to creditor protection measures, related-party transactions, and fundamental corporate actions such as mergers and charter amendments. Finally, it concludes with an examination of friendly acquisitions, hostile takeovers, and the regulation of the capital markets. Contributors to this volume - Hansmann and Kraakman Hansmann and Kraakman Hansmann and Kraakman Hertig and Kanda Hertig and Kanda Rock, Kanda, and Kraakman Davies and Hopt Hertig, Kraakman and Rock Hertig, Hansmann, Kraakman, Rock, Hopt and Kanda Hertig, Hansmann, Kraakman, Rock, Hopt and Kanda Davies, Hertig and Hopt
Book
The late seventeenth century was a crucial period in English financial history. A host of joint-stock companies emerged offering the opportunity for investment in projects ranging from the manufacture of paper to the search for sunken treasure. Driven by the demands of the Nine Years’ War, the state also employed innovative tactics to attract money, its most famous scheme being the incorporation of the Bank of England. This is the first comprehensive study of the choices and actions of the investors who enthusiastically embraced London's new financial market. It highlights the interactions between public and private finance, looks at how information circulated around the market and was used by speculators and investors, and documents the establishment of the institutions - the Bank of England, the national debt and an active secondary market in that debt - on which England’s financial system was built.
Article
This is the first comprehensive history of British commercial insurance. The history of social insurance, or what may be regarded as related thereto
Article
Sumario: Historical setting -- Du Pont: creating the autonomous divisions -- General Motors: creating the general office -- Standard oil company (New Jersey): ad hoc reorganization -- Sears, Roebuck and company: decentralization, planned and unplanned -- Organizational innovation: a comparative analysis -- The spread of the multidivisional structure -- Conclusion: chapters in the history of the great industrial entreprise.
Article
I. Introduction, 488. — II. The model with automobiles as an example, 489. — III. Examples and applications, 492. — IV. Counteracting institutions, 499. — V. Conclusion, 500.
Article
The paper first develops an economic analysis of the concept of shareholder value, describes its approach, and discusses some open questions. It emphasizes the relationship between pledgeable income, monitoring, and control rights using a unifying and simple framework. The paper then provides a first and preliminary analysis of the concept of the stakeholder society. It investigates whether the managerial incentives and the control structure described in the first part can be modified so as to promote the stakeholder society. It shows that the implementation of the stakeholder society strikes three rocks: dearth of pledgeable income, deadlocks in decision-making, and lack of clear mission for management. While it fares better than the stakeholder society on those three grounds, shareholder value generates biased decision-making; the paper analyzes the costs and benefits of various methods of protecting noncontrolling stakeholders: covenants, exit options, flat claims, enlarged fiduciary duty.
Article
This article examines how the marine insurance industry evolved in Britain and America during its critical formative period, focusing on the information asymmetries and agency problems that were inherent to the technology of overseas trade at the time, and on the path-dependent manner in which the institutions that addressed these problems evolved. I argue that the market was characterized by multiple equilibria because of a potential lemons problem. Exogenous shocks and endogenous institutional development combined to bring about a bifurcation of institutional structure, the effects of which persist to the present day.
LMA)/CLC/B/192/8727A, Abstract book of rules, decisions, orders etc. relating to the administration and structure of the Corporation
  • London Metropolitan Archive
The 1719–20 Stock Euphoria: A Pan-European Perspective
  • Condorelli
Die ersten hamburgischen Assecuranz-Compagnien und der Aktien-handel im Jahre 1720
  • C Amsinck
A History of Lloyd’s. London: MacMillan
  • C Wright
  • C C Fayle
La Belgique commerciale sous l’empereur Charles VI. La Compagnie d’Ostende
  • M Huisman
An Historical and Chronological Deduction of the Origin of Commerce. London: 1801
  • A Anderson
The London Assurance: A Second Chronicle
  • B Drew
Chapters of Insurance History; The Origin & Development of Insurance in England. London: Post Magazine & Insurance Monitor
  • F Haines
Trade and Trust in the Eighteenth-Century Atlantic World: Spanish Merchants and Their Overseas Networks
  • X Lamikiz
The Constitution and Finance of English
  • W R Scott
The London Assurance
  • G Street
A Survey of the Cities of London and Westminster
  • J Stow