Early books on investing at the dawn of modern business in America.(Report)

Abstract: The purpose of this study is to enhance understanding of early investment practices and the role financial and other information played in those practices. The primary method employed is to examine early books on investing published in the U.S. Early authors described stock market operations including manipulations of security prices by the bulls and the bears. Their solution to this manipulation was to educate investors and provide company information, mostly through directories and manuals. This study shows that financial and other information was thought by the authors to be critically important at the time that the securities markets were first called upon to provide capital to the railroad industry, the first modern business in America.

INTRODUCTION

Jim Cramer [2006] of CNBC's Mad Money advocates doing homework before purchasing a stock. This entails knowing how a company makes money; those factors that influence its sector; assessing its performance; checking out its competition, including evaluating earnings and growth; and analyzing its balance sheet and cash flow statement. Billionaire investor Warren Buffet's [2001] approach involves studying the prospects of a business, assessing the quality of its management, and purchasing its stock at a reasonable price. He is interested in easy to understand businesses that are very likely to have long-term earnings growth. Fama and French [1992] have found that factors other than beta from the capital asset pricing model are associated with stock returns [Sharpe, 1964; Lintner, 1965]. These factors are company size and book-to-market equity. In short, prudent investing requires information.

While information is currently important to investors, was this always the case? And, if so, what type of information was considered useful? To help answer these questions, this study examines the role of information in early securities markets. In particular, it investigates the development of the financial markets for corporate securities in the U.S. and the attendant demand and supply of financial and other information for those markets.

The primary method of investigation entails examining the earliest books on investing published in the U.S. The time period covered ranges from 1848 through the 1860s, which, by no coincidence, corresponds with the rise of the railroad, the first modern business in America. The books examined portray the security markets, the need for information to make informed decisions, and the initial attempts to fulfill that need in a systematic way through directories and manuals. Those initial attempts to provide information are consistent with the Financial Accounting Standards Board's main rationale of financial reporting, namely providing information useful in investment and credit decisions [FASB, 1978]. By enhancing understanding of the development of investment practices and information needs, this study should lead to a greater appreciation of both the role and the evolution of financial reporting.

Two methods are used to identify books for this study. First, using WorldCat [2005], books are identified based on a fairly comprehensive list of search terms. (1) The search period ranges from the founding of Jamestown in 1607, the first permanent English settlement in the future U.S., through 1869, the closing date of this study. Second, also included in this study are the earliest railroad directories and manuals identified by Chandler [1956]. (2)

Since the focus is on investment in corporate securities, the following additional criteria are used to identify a book for this study. First, the book must deal with investing in stocks or bonds of corporations; governmental securities are excluded. The book must address more than one corporation and not be limited to corporations in a single region (e.g., railroads in the Confederate States of America). Since the emphasis is on general investing practices, a book on a single corporation or a single region, which often appeared to be promotional, seemed of limited usefulness. Books focusing on the legal aspects of corporations or acts of legislatures, for which there were a fair number of hits, were omitted. While legal aspects undoubtedly play a role in the selection of securities, the emphasis here is on investing practices, taking the legal background as given although it does change over time. As noted, the book had to be published in the U.S. and concerned with American markets and companies. Though securities are 'certainly traded in other countries, the focus is on the U.S., which currently has the most extensive security exchanges in the world. It is the development of investment practices and the provision of financial information in that context that is of interest here. Corollaries are that the book had to be written in English, not be an Americanized version of a book initially published elsewhere (e.g., London), and be non-fiction. Finally, candidate books had to be available through interlibrary loan so that they could be reviewed.