A History of Corporate Finance
Aggarwal, Raj, The Accounting Historians Journal
Jonathan Barron Baskin and Paul J. Miranti, A History of Corporate Finance (New York: Cambridge University Press, 1997, 350 pp., $29.95).
This book is a study of the role of institutions and organizations in the historical development of corporate finance in Western Europe and North America. A major goal of this book is to "demonstrate the need for greater recognition of path dependence and historical evolution in the modern theory of finance" [p. 3]. In addition, a number of writers have argued that the study of economic and financial history can be useful in understanding contemporary developments [North, 1978; Braudel, 1982]. However, there are relatively few books on the history of corporate finance and, thus, this book is a particularly welcome addition.
This book consists of a preface and an introduction, seven chapters organized into three parts, and an epilogue and two appendices. The introduction notes that business institutions represent constraints that "are, in effect, the rules of the game for pursuing opportunity...and their value lies largely in their ability to reduce uncertainty" [p.4]. It is also noted that "firms bolstered efficiency through financial innovation" [p. 5].
The introduction goes on to explain how finance contributed to business efficiency and growth. First, finance allowed firms the time and stable funding to exploit economies of scale and scope. Second, financial innovation often helped firms cope with and even take advantage of external economic shocks. Financial innovations also lowered perceived risks faced by investors and allowed better monitoring of managers. Finally, financial innovation also allowed better management of corporate resources and gave firms the ability to overcome market imperfections by internalizing high-cost market transactions. The rest of the introduction describes the development of the modern theories of asset pricing, agency costs, asymmetric information, and corporate debt policies. Curiously, in discussing the random behavior of market determined asset prices, this book cites the 1953 study by M.G. Kendall as the beginning of this recognition, ignoring the well-known and much earlier ( 19th century) work of Louis Bachelier and others (e.g., Bernstein, 1996).
Part I consists of three chapters that review finance in the preindustrial world (actually just Europe). The two chapters in Part II cover the development of European finance during the era of industrialization. Part III traces the evolution of finance in Western Europe and North America into the modem era.
Chapter one describes the development of finance in Italy in the late middle ages and the early Renaissance period. This chapter has some excellent descriptions of international banking and how business financial structures in Florence and Venice of the thirteenth and fourteenth centuries were used to diversify risk and leverage returns on equity. However, it has very little about business financial arrangements prior to that period.
Chapter two covers the fifteenth through the eighteenth centuries and traces the rise, along with international trade, of the Joint Stock Companies, like the East India Company, as precursors to modern limited liability corporations. Chapter three covers the early development of public securities markets in England and western Europe in the eighteenth century.
Part II consists of two chapters and covers the development of corporate finance in the age of industrialization (late eighteenth to the mid twentieth centuries). Chapter four covers the financing of canals and railroads especially in the United States and chapter five describes the rise of equity markets and managerial capitalism in the first half of the twentieth century.
Part III also consists of two chapters and traces the evolution of corporate finance into the modern era. Chapter six focuses on the financing of large US companies in the post-war era until the oil shock of 1973, while chapter seven covers the rise of the conglomerate firm and the leveraged buy-out phenomenon in recent years. …