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The Role of the Media in a Bubble

Journal: Explorations in Economic History

Date: 20121001

Author: Campbell, Gareth; Turner, John D.; Walker, Clive B.

Abstract:
We examine the role of the news media during the British Railway Mania, arguably one of the largest financial bubbles in history. Our analysis suggests that the press responded to changes in the stock market, and its reporting of recent events may have influenced asset prices. However, we find no evidence that the sentiment of the media, or the attention which it gave to particular stocks, had any influence on exacerbating or ending the Mania. The main contribution of the media was to provide factual information which investors could use to inform their decisions.

Link: Google Scholar

Background and Context

The Railway Mania

The British Railway Mania of the 1840s was one of history's largest financial bubbles, with over 1,000 railway companies promoted during 1844-45 and railway stocks doubling in value before crashing.

Media Landscape

Newspapers and periodicals were the only source of information for investors during the 1840s, with the Railway Times having the widest circulation among railway-specific publications.

Research Approach

The study analyzed media content using linguistic analysis software and manual evaluation, examining railway press coverage between 1843-1850 alongside stock price data for 591 railway stocks.

Media Coverage Declined After Market Peak

  • Media coverage peaked in 1845 during the height of the Railway Mania
  • Coverage steadily declined after the market crash in late 1845
  • By 1850, coverage had fallen to less than half of its peak levels

Advertising Revenue Influenced Railway Press Coverage

  • Advertising peaked at 54.9% of content in 1845 during the market boom
  • The Railway Times earned substantial revenue from railway company advertisements
  • Advertising content declined significantly after the market crash

Media Sentiment Did Not Drive Stock Returns

  • Critical editorials from major newspapers did not cause market declines
  • Railway stocks continued to rise by 0.38% on average following negative press
  • Media sentiment had little impact on investor behavior

Media Coverage Reflected Company Size

  • Companies with more media coverage tended to be larger firms
  • Coverage differences in returns disappeared when controlling for size
  • Media attention reflected rather than caused company performance

Dividend Changes Drove Market Movement

  • Railway dividends increased during the boom phase
  • Dividends began declining steadily from 1847 onwards
  • Changes in fundamentals, not media coverage, drove market movements

Contribution and Implications

  • The media primarily served as an information disseminator rather than market influencer during the Railway Mania
  • Media coverage responded to market events but did not drive speculative behavior
  • Changes in fundamental factors like dividends, not media sentiment, caused market movements

Data Sources

  • Media coverage chart based on Table 2 word count data
  • Advertising content chart based on Table 2 advertising percentage data
  • Stock returns chart based on Table 6 event study results
  • Coverage analysis chart based on Table 9 portfolio returns data
  • Dividend chart based on dividend/par ratio data from Figure 6