Background and Context
Historical Setting
The British Railway Mania of the 1840s was one of the largest asset price bubbles in history, with railway share prices rising substantially from 1843 to 1845 before falling steadily until 1850.
Research Focus
The study examines whether investors during the Railway Mania had myopic rationality - meaning they were able to predict short-term but not long-term dividend changes while pricing assets consistently given their expectations.
Methodology
Analysis of a comprehensive dataset of weekly stock prices and dividends for railway and non-railway companies between 1843-1850, including cross-sectional regressions examining the relationship between prices, dividends and growth.
Railway Share Prices Diverged Significantly from Non-Railways During the Mania
- Railway share prices increased dramatically between 1843-1845, reaching a peak 71.7% above their 1843 level
- Non-railway shares showed much more modest gains, rising only 15.8% during the same period
- Railway shares subsequently crashed and fell below their 1843 levels by 1850
Railway Dividend Yields Deviated Significantly from Market Norms
- Railway dividend yields fell to historically low levels during the boom phase
- Non-railway dividend yields remained stable throughout the period
- Railway dividend yields eventually rose above non-railway yields during the bust phase
Railway Companies Showed Strong Short-Term But Poor Long-Term Dividend Growth
- Companies showed strong positive dividend growth in the short-term (1-2 years)
- Growth turned negative in the medium term (2-3 years)
- Evidence that investors could predict short-term but not long-term dividend changes
Price-to-Par Ratios Show Consistent Pricing Across Railway Categories
- Dividend-paying railways consistently commanded higher valuations than non-dividend paying railways
- Price-to-par ratios declined significantly for all categories after the peak of the Mania
- Evidence of rational pricing given the dividend status of companies
Network Expansion Coincided with Dividend Declines
- Railway network expanded from 2,057 miles in 1843 to 6,123 miles in 1850
- Dividend rates peaked in 1847 and then declined sharply as network expansion continued
- Evidence that overexpansion contributed to the decline in railway profitability
Contribution and Implications
- The study shows investors were "myopically rational" - they priced assets consistently given their expectations but could not predict long-term changes
- Investors successfully incorporated short-term dividend growth into valuations but failed to anticipate the negative impacts of railway network expansion
- The findings suggest asset price bubbles can occur even when investors are acting rationally based on available information
Data Sources
- Share price indices based on data from Table 1 showing descriptive statistics of companies by industry
- Dividend yield analysis based on Table 2 showing yearly panel regressions of dividend growth
- Growth coefficients derived from Table 4 showing significant variables from cross-sectional regressions
- Price/par ratios from Table 7 showing ratios for established and new railways
- Network expansion and dividend data from Figure 8 and Figure 9 in the paper
Infographics by Topic
