Academic journal article Accounting Historians Journal

Railroad Investing and the Importance of Financial Accounting Information in 1880s America

Academic journal article Accounting Historians Journal

Railroad Investing and the Importance of Financial Accounting Information in 1880s America

Article excerpt

Abstract: This study has a two-fold purpose. First, it seeks to determine the importance of financial accounting information to railroad investors (and speculators) in 1880s America. Second, a further goal is to ascertain what financial accounting information was readily available for use by these investors. Based on a comprehensive search of books of the era, the 1880s were a time of expanding advice for railroad securities holders that required the use of financial accounting information. Furthermore, new information sources arose to help service investors' needs. Statistics by Goodsell and The Wall Street Journal were two such sources. This article reviews these publications along with the ongoing Commercial and Financial Chronicle and Poor's Manual of the Railroads of the United States. Each of these sources helped railroad investors to follow contemporary advice of gathering financial accounting and other information when investing.

INTRODUCTION

This study investigates the importance of financial accounting to railroad investing in 1880s America. It examines railroad investors' information wants as depicted in books and the availability of information in financial periodicals. Hence, it enhances understanding of the evolution of financial accounting and its role in investing in railroad securities.

Financial accounting became important to railroad investing in the late 1840s and 1850s as railroads came to rely on securities markets as a source of capital. Initially, periodicals and railroad manuals supplied some rudimentary information to security market participants. In the 1870s, information increased in depth and frequency. Poor's Manual became more comprehensive while Hunt's Merchants' Magazine published weekly instead of monthly [Thompson, 2008, 2011].

This research examines stock market advice and sources of information in the 1880s. Authors expanded their advice, some of which is still with us today. Financial information on railroads proliferated. Poor's Manual and the Commercial and Financial Chronicle and Hunt's Merchants' Magazine (Chronicle) extended their coverage. Statistics [Goodsell, 1883], primarily a railroad manual, began publication as did The Wall Street Journal as a daily business newspaper.

To carry out this research, relevant books and serial publications were identified from WorldCat [2007 - 2010] using a comprehensive list of stock and bond market terms. Searching was not restricted to railroad securities, but invariably the sources dealt with railroads, the dominant business of the day. Included are American publications obtainable via interlibrary loan about the New York Stock Exchange (NYSE) or general works on investing and speculation. Excluded are regional and legal publications.

The method employed herein differs from that used by others in studying the financial reporting of railroads in the nineteenth century. Some authors examined the annual reports of specific railroads to learn of financial reporting practices including Boockholdt [1978], Previts and Samson [2000], and Flesher, Previts, and Samson [2006]. Other authors studied railroads in conjunction with a particular accounting issue such as capitalization versus expense [Brief, 1963], early auditing [Boockholdt, 1983], income smoothing [Buckmaster, 1992], and depreciation [Heier, 2006]. Such studies emphasize a preparer's perspective, focusing on descriptions and procedures in financial reports. This research emphasizes a user's perspective, concentrating on what investors wanted to know and what information was available to them. It addresses financial reporting's primary objective of providing information for investing (and creditor) decisions [Financial Accounting Standards Board, 2010].

Organization of this article is as follows. In the first section, I portray the securities markets of the 1880s, the backdrop for the study. In subsequent sections, I review the advice offered to railroad investors and the contents of those informational sources. …

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