Working Paper: NBER ID: w14892
Authors: Eric Hilt
Abstract: In July of 1826, several prominent Wall Street firms abruptly went bankrupt, amid scandalous revelations of fraudulent financial practices by their management. Although mostly forgotten today, these events represented a watershed in the early development of the corporation laws and investor protections governing Wall Street: in the aftermath of the scandals, New York State enacted an extensive package of legislation designed to protect the interests of investors. These statutes were some of the the very first of their kind, and had a lasting influence. This paper analyzes the causes of the failures, and the evolution of the law in response. The analysis highlights the critical role played by scandal-driven legislation in the evolution of investor protections and financial regulations.
Keywords: No keywords provided
JEL Codes: G01; G18; G3; K22; N21; N81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Concentration of control among directors (G34) | Increased likelihood of firm failure (G33) |
| Higher proportion of shares under managerial control (G34) | Higher probability of firm failure (G33) |
| Excessive control rights (G34) | Opportunistic behavior by directors (G34) |
| Opportunistic behavior by directors (G34) | Firm collapses (G33) |
| Manipulation of ownership structures (G34) | Incentives for directors to act against interests of shareholders (G34) |