Please rotate your device to landscape mode to view the charts.

The anatomy of a bubble company: the London Assurance in 1720

Journal: Economic History Review

Date: 2023

Author: Graeme Acheson, Michael Aldous, William Quinn

Abstract:
The London Assurance Company (LA), which incorporated during the bubble of 1720, experienced more dramatic price movements in its shares than the South Sea Company. This paper examines how incorporating during the bubble affected its long run performance. We show that the bubble in the Company's share price was partly attributable to changes in market structure during the share issuance process. As a result of the bubble, the Company's original subscribers, who had been curated for expertise and political connections, overwhelmingly exited during 1720 and were replaced by unsuccessful speculators. Analysis of LA shareholder behaviour up to 1737 suggests that this loss of shareholder expertise had detrimental consequences for the Company's performance. These results demonstrate how a bubble in the shares of a newly created company can lead to an exodus of value-adding investors, damaging the company's long-term prospects.

Link: Google Scholar

Background and Context

Historical Setting

Study examines the London Assurance Company during the South Sea Bubble of 1720, one of the first major financial bubbles in British history.

Research Focus

Analyzes how incorporating during a financial bubble affected the company's ownership structure and long-term performance using newly discovered shareholder records.

Methodology

Utilizes three unique datasets: original subscription receipts from 1719, shareholder registration documents from 1720, and long-term shareholder registers extending into the mid-18th century.

Sharp Rise and Fall in London Assurance Share Prices During 1720

  • Share prices remained stable around £3-6 until April 1720
  • Dramatic increase to £135 by August 1720 - a 5900% rise from late 1719
  • Sharp crash back to around £10 by December 1720

Exodus of Original Informed Investors During the Bubble

  • 86% of original Bank of England investors remained after one year
  • Only 19% of original London Assurance investors remained after one year
  • Shows abnormally high exit rate during bubble compared to normal conditions

Investment Horizons by Occupation During Peak Bubble Period

  • Financial industry professionals had shortest holding periods (2.59 years)
  • Middle class and women investors held longest (over 6 years)
  • Shows different investment strategies across investor types

Decline in Market Share of Corporate Marine Insurance

  • Corporate insurers initially gained 10% market share at launch
  • Share declined to 3% by 1810
  • Averaged around 6% through 1823

Long-term Investment Pattern Changes by 1737

  • By 1737, investors who sold shares held for average of 13.38 years
  • Those who held until death kept shares for average of 27.03 years
  • Shows transformation to very long-term passive investment pattern

Contribution and Implications

  • Demonstrates how financial bubbles can transform company ownership by driving out informed early investors
  • Shows that market structure and liquidity constraints significantly affected share price movements during the bubble
  • Reveals how bubble-period ownership changes led to long-term corporate underperformance through loss of expertise and passive shareholding

Data Sources

  • Share price chart based on Figure 1 data from the article
  • Investor retention comparison based on Table 6 data
  • Investment horizons by occupation based on Table 8 data
  • Market share decline based on text data from p.177
  • Long-term investment patterns based on Table 7 data