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Going public in interwar Britain1

Published online by Cambridge University Press:  17 February 2010

David Chambers
David Chambers
Affiliation:
Judge Business School, Cambridge [email protected]
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Abstract

Utilising a new sample of interwar initial public offerings (IPOs), I consider the effectiveness of the interwar stock market for firms going public. Consistent with the pecking order theory, IPO proceeds contributed only modestly to domestic industry's capital expenditure needs. IPOs of capital-hungry new manufacturing industries raised no more finance than did the rest of manufacturing. This was in part attributable to the detrimental effect of weak financial regulation on investor appetite for newer, riskier enterprises. In terms of the quality of firms allowed onto the market, IPO survival rates of the early and late 1920s were shockingly low, just as earlier research has shown. However, survival rates rebounded strongly in the following decade due not only to the economic recovery but also to tougher scrutiny of listing applications by the London Stock Exchange.

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Articles
Information
Financial History Review , Volume 17 , Issue 1 , April 2010 , pp. 51 - 71
Copyright
Copyright © European Association for Banking and Financial History e.V. 2010

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35 The Midland Bank Review estimated total new issue proceeds at £1,700 m. The difference is represented by SEO proceeds, which for reasons discussed above, I am unable to include in this sample.

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38 Any securities issued but not quoted are valued at par.

39 Mowery and Rosenberg, Technology, ch. 4 and tables 4.2 to 4.5. Research intensity is defined as number of scientific personnel per 1,000 wage earners.

40 As a further check, I made use of prospectus disclosure regarding whether a firm engaged in research and development activity. There were only 49 such firms in the sample, but these firms were highly correlated with the new manufacturing industrial classification.

41 I am grateful to Mike Staunton for providing this data.

42 The Companies Acts of 1900 and 1907 required public companies to publish a balance sheet. However, many companies only converted to public company status immediately prior to their IPO, and, therefore, would have escaped this requirement at IPO.

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44 This approach follows Henderson, New Issue Market, in excluding long-term, but not short-term, debt repayment. Bank overdrafts represent short-term funding of capital expenditure in anticipation of the subsequent equity issue. However, overdrafts used to fund an acquisition are excluded.

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69 Applications were either rejected outright or postponed until publication of the first set of accounts.

70 There is no record of the total number of applications which would be a more appropriate denominator for estimating a rejection rate.

71 Rule 159 App. 34 Sch. II Pt. A.

72 Michie, London Stock Exchange, p. 416.

73 Chambers and Dimson, ‘IPO underpricing’.

74 In all, 128 start-ups went public between 1919 and 1938. I have excluded the 10 property development start-ups launched in the late 1950s and early 1960s.