by Tehreem Husain (University College, London). This blog is based on the author’s presentation to the Economic History Society’s annual conference, 2021 (session NRIID)
During the first era of globalisation, government and railway securities were the two most important avenues of investment on the London Stock Exchange, comprising a combined share of 83.2 percent of British investment in 1893 (Goetzmann & Ukhov, 2006). Railways were among the first enterprises to access large-scale external finance, possessing aspects of both public and private ownership and management. Consequently, railway bonds and securities were quasi-sovereign in character. Although there has been substantial research on sovereign securities between 1880 and 1913, railway securities have received less attention. This neglect means there is scope to increase our understanding of the relationship between the two asset classes and how investors formed and optimised their portfolios of global securities.
To understand the relationship between government and railway securities I investigate the determinants of yield spreads on both securities in fifteen advanced and emerging economies between 1880 and 1913. I use a variety of different databases such as Investors Monthly Manual, Making of Global Finance database (2004), various issues of Statistical Abstracts for Foreign Countries, Statistical Abstract for the Several Colonial and Other Possessions of the United Kingdom, and International Historical Statistics. These data sources are used to build a dataset encompassing various financial, macroeconomic, and firm-specific variables of railways and sovereign governments.
The dataset exhibits substantial heterogeneity in terms of macroeconomic and financial characteristics. Using panel corrected standard errors and principal component analysis techniques, my research indicates that interest servicing was the common factor explaining yield spreads on railway and government securities. Thus, a 10 percent increase in the ratio of interest servicing to revenue leads to a 32 basis point increase in spreads on railway securities. Besides interest servicing on debt, yield spreads on government securities were also an important determinant of spreads on railway securities.
Railways could not have attracted substantial investment without active government support in the form of subsidies on land, capital, and preferred treatment for concessionaires. This support meant railway securities presented a lucrative asset class which was usually safe because of government guarantee, while offering yields in excess of sovereign yields. My analysis indicates that sovereign creditworthiness had a spillover effect on the pricing of railway securities precisely because of government guarantees.
Using the taxonomy of capital-rich and capital-poor countries, I also investigate the impact of country heterogeneity (Flandreau & Zumer, 2004) on investors’ perceptions of the creditworthiness of railway securities. Preliminary results indicate that investor perceptions of country risk had a significant impact on the yield spreads of railway securities. Investors considered railway indebtedness alone when investing in capital rich countries; conversely, in capital poor countries, both railway indebtedness and country interest servicing capacity are significant in explaining yield spreads on railway securities.
Current research on foreign investment during the first era of globalisation has largely focused on analysing investors’ perceptions regarding country risk by analysing sovereign securities. This paper expands the debate by looking at both sovereign and quasi-sovereign securities (railways), highlighting the importance of the latter. From a policy perspective, this paper provides a historical reference to the growing market of public and publicly-guaranteed debt today.
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Flandreau, M., & Zumer, F. (2004). The making of global finance. Paris: OECD.
Goetzmann, W. N., & Ukhov, A. D. (2006). British investment overseas 1870–1913: a modern portfolio theory approach. Review of Finance, 10(2), 261-300.