Share portfolios in the early years of financial capitalism: London, 1690–1730

Abstract

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.T he dramatic expansion of private and public financial markets following the Glorious Revolution has received extensive attention. Although predating the Glorious Revolution, the stock market flourished in its immediate aftermath, helped by well-defined ownership rights in shares, ease of purchase and sale, and transparency in pricing promulgated by the rise of the financial press. 2 By 1720, the stock market was well entrenched as a tool for commerce, public finance, and savings. Companies used it for initial public offerings or net additions to their capital stock, while merchants, tradesmen, and individuals could use shares as collateral. 3 The government used the market to rationalize its public debt through a series of debt-for-equity swaps, mediated through the so-called 'monied' companies: the Bank of England, the New East India Company, the United East India We are very grateful for all the comments and suggestions. We are also extremely grateful to Anne Murphy for the use of her data and to Anne Murphy, Angela Redish, three anonymous referees, and the editor for their helpful comments.2 Carlos,

Financial diversification before modern portfolio theory: UK financial advice documents in the late nineteenth and the beginning of the twentieth century

“…In other words, after the establishment of the discipline of financial economics in the 1960s (Jovanovic 2008), the rise of MPT was mostly seen as a genuine break with the past, signifying a lack of financial sophistication in investment strategies before the 1950s. It is usually argued that not until Markowitz' paper on diversification in 1952, and in practice not until the advent of fast computers in the 1970s, were these modern approaches to portfolio with studies even investigating diversification as early as in the aftermath of the Glorious Revolution in the 17th century (Carlos et al 2015). At the same time, some of the analytical insights of MPT had also been addressed before Markowitz's paper in 1952.…”

Stock prices' interdependence during the South Sea boom and bust

“…3 A bubble is created when asset prices systematically deviate from fundamental values. 4 The new Chartered Bank of England dominated the market activity in the 1690s with its initial subscription in 1694 and its additional capital stock in 1697 (Carlos, Fletcher, & Neal, 2015). According to Shea (2007b), during the South Sea bubble along with the shares market, there was also a financial derivatives market that attracted a large number of investors.…”

“…4 The new Chartered Bank of England dominated the market activity in the 1690s with its initial subscription in 1694 and its additional capital stock in 1697 (Carlos, Fletcher, & Neal, 2015). 7 The Bank of England, the New East India Company, and the United East India were also involved in the debt-for-equity scheme (Carlos et al, 2015). 6 Roughly 0.5% of the total British population had invested in the stock market (Carlos et al, 2015).…”

“…By 1695, there were at least 140 companies with a combined capital of £4.5 million, the majority of which was accounted for by three of the largest companies-East India Company, New East India Company, and the Bank of England. Carlos et al (2015) further show that, despite a substantial increase in the number of investors from, the 1690s and onwards, the large bulk (80%) of the investors held shares in only one company and failed to properly diversify their portfolios. Carlos et al (2015) further show that, despite a substantial increase in the number of investors from, the 1690s and onwards, the large bulk (80%) of the investors held shares in only one company and failed to properly diversify their portfolios.…”

“…4 There was a shift from more personal to more interpersonal financial interactions due to the expansion of the stock market (Carlos et al, 2015). 5 By 1720, the stock market became an important tool for commerce, public finance, and savings (Carlos et al, 2015) and was used by companies for Initial public offering (IPOs), debt-for-equity swaps by the government, as a vehicle for savings and personal finance, and shares for collateral by individuals and business. 5 By 1720, the stock market became an important tool for commerce, public finance, and savings (Carlos et al, 2015) and was used by companies for Initial public offering (IPOs), debt-for-equity swaps by the government, as a vehicle for savings and personal finance, and shares for collateral by individuals and business.…”