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Managerial Failure in Mid-Victorian Britain? Corporate Expansion during a Promotion Boom

Journal: Business History

Date: 20151001

Author: Campbell, Gareth; Turner, John D.

Abstract:
This article examines the mid-1840s expansion of the British railway network, which was associated with a large deterioration in shareholder value. Using a counterfactual approach and new data on railway competition, we argue that the expansion of the railway companies, and their subsequent decline in financial performance, was not due to managerial failure. Rather, the promotion of new routes by established railways and mergers with other companies was part of a managerial strategy to maintain incumbent positions, and may have been preferable to not expanding whilst their competitors did.

Link: Google Scholar

Background and Context

Time Period & Setting

Study examines the mid-1840s railway network expansion in Britain, when network size tripled within a few years during what became known as the "Railway Mania".

Research Question

Investigates whether managerial failure was present in railway companies during this period of expansion, given the subsequent decline in shareholder value.

Methodology

Uses counterfactual analysis and new data on railway competition constructed from historical railway guides and timetables to analyze management decisions and outcomes.

Dramatic Growth in Railway Network Size and Investment 1825-1870

  • Shows the massive expansion of British railways during the "Railway Mania" period
  • Total par value of railways increased from £40M to £120M between 1845-1850
  • Represents the largest expansion of the equity market in the 19th century

Decline in Railway Company Dividends 1843-1850

  • Dividends initially increased from 4.7% to 7% between 1843-1847
  • Fell dramatically to 2.7% by 1850 as network expanded
  • Never recovered to pre-boom levels even after temporary 1860s boom

Increased Competition on Railway Routes 1843-1850

  • In 1843, 67% of railway segments had no competing alternative route
  • By 1850, only 29% of segments had no alternative route
  • Competition increased across all types of routes, including major trunk lines

Decline in Population Served Per Mile of Track 1843-1850

  • Population served per mile fell from 11,761 to 7,013 for established companies
  • New railways entered less populous areas with lower traffic potential
  • Reflects expansion into less economically viable regions

Larger Railways Maintained Better Financial Performance in 1850

  • Larger networks achieved higher returns on capital
  • Companies that expanded more maintained better profitability
  • Suggests expansion strategy was rational given competitive environment

Contribution and Implications

  • Railway managers acted rationally by expanding to protect their competitive position, rather than displaying managerial failure
  • First comprehensive measure of railway competition in 1840s Britain using novel data from historical railway guides
  • Demonstrates that the well-documented managerial problems in late Victorian railways had not yet emerged in the 1840s

Data Sources

  • Network Growth Chart: Based on Figure 3 showing total par value of railways 1825-1870
  • Dividend Chart: Based on Figure 4 showing annual railway dividends 1832-1870
  • Competition Chart: Based on Table 3 comparing railway segments with no substitute routes
  • Population Chart: Based on Table 6 showing company mileage and population statistics
  • Performance Chart: Based on Table 9 analyzing relationship between network size and financial metrics