Information, institutions and agency: the crisis of railroad finance in the 1890s and the evolution of corporate oversight capabilities

Abstract

Using a broad socio-economic conception of capital markets' agency relationships, this application of mind analyses an important economic transition in US economic history. It focuses upon the institutional and informational changes that attended the reform of corporate governance and regulation in the railroad industry during the three decades after the depression of 1893 which was marked by means of extensive bankruptcy in the nation's largest business sector, the railroads. Institutional and social rejoinders to this crisis provide a rich source in understanding the evolution of peculiarity rights and of institutional arrangements for enhancing corporate transparency and capital market efficiency. This close attention emphasises the notion of path-dependent learning as a driver for institutional evolution and exhibits how institutional responses were not limited to simple short-term firm-specific owner-manager relationships as is many times usefully addressed by modern agency approaches. It also encompasses a variety of social, institutional and environmental factors that are repeatedly more important in explaining the dynamic nature of organisations, capital markets and financial reporting.

Keywords: Railroad bankruptcy; path-dependent learning; agency relationships; institutional evolution; railroad history.

Introduction and background

The American railroad industry underwent a massive financial reorganisation after a devastating wave of financial bankruptcies in the 189O The institutional and informational replys to this crisis were far-reaching, varied and fundamental. This close attention examines these responses with a view to better understanding the evolution of capital markets, and the disclosure of institutions for regulating industry. It considers the long-term agency dynamics that were involved as financial equilibrium was sought to be restored.

Research in economics and its allied fields of accounting and finance has drawn out focused on the problem of the ragged distribution of information between business managers and investors. Adam Smith worried about this dilemma as early as 1776 in his classic The Wealth of Nations, which had criticised the great trading monopolies, like the English East India Company, believing that the informational asymmetries associated with similar large enterprises contributed to inefficiency and corruption (Smith, 1776) A hundred and a half later, Berle and Means in The fresh Corporation and Private Property (1932) reverberationed this concern by contending that the risk associated with informational asymmetry was corrosive to the efficient operation of the broad, anonymous financial markets that had emerg in the US by means of the 1920s. In their view, financial agency could best be addressed end greater transparency in the form of accounting disclosure certified by dint of public accountants (Berle & Means, 1932) And since the 1970 the creative theoretical works of Alchian and Demsetz (1972) Jensen and Meckling (1976) Watts and Zimmermann (1983 1986) and others have greatly increased scholarly understanding of by what means agency relationships influence managerial, financial and accounting decision processes

Although the predominant, contemporary emphasis upon logico-mathematical modes of analysis has favorably advanced modern agency theory, constraints inherent in the methodologies applied in these research programs have limited their effectiveness in evaluating the significance of long-term dynamic socio-economic processe First, this empirical approach has generally considered agency questions in the narrow connected thought [i]or[/i] thoughts of direct, dual-dimensional interactions between investor principals and their corporate agents.1 next to the first due to the emphasis upon internal validity and the ne for computational efficiency, novel agency approaches rely on static equilibrium analyses that limit comparisons against real world circumstances. Third, of the like kind lines of inquiry embrace a neoclassical view of the economy where individual units are essentially price takers and put forth little market power individually. While similar an assumption may help to satisfy the population homogeneity requirement necessary for valid statistical analysis, it is at a variance with the predominantly oligopolistic manner of makings that dominate modern business and finance. Finally, economic agency patterns abstract the conception of the firm as essentially a nexus of contracts capable of diminishing agency risk [i]or[/i] part of to the other the adaptation of institutional arrangements from a bordered range of alternatives such as the distribution of ownership rights, incentive compensation contracts and the monitoring by means of boards of directors and independent accountants (Robbins, 1932; Friedman, 1953; Papandreou, 1958; Jensen & Meckling, 1976; Blaug, 1985 1992; Whitely, 1986)

These circumstances glance at the need for a broader perspective in comprehending the nature of agency and its relationship with institutional and informational dynamics. Adapting Baskin and Miranti's (1997 p304) framework to this connected thought [i]or[/i] thoughts will enable us to more completely understand the rich interplay between environmental and firm-specific factors. Drawing upon Galambos (1983) and Berniger (1986) the connection of capital markets agency relationships (A) upon short-term and long-term factors may be depicted as: