Reviewed by Raj Aggarwal John Carroll University

This book is a study of the role of institutions and organizations in the historical development of corporate finance in Western Europe and North America. A major goal of this book is to “demonstrate the need for greater recognition of path dependence and historical evolution in the modern theory of finance” [p. 3]. In addition, a number of writers have argued that the study of economic and financial history can be useful in understanding contemporary developments [North, 1978; Braudel, 1982]. However, there are relatively few books on the history of corporate finance and, thus, this book is a particularly welcome addition.

This book consists of a preface and an introduction, seven chapters organized into three parts, and an epilogue and two appendices. The introduction notes that business institutions represent constraints that “are, in effect, the rules of the game for pursuing opportunity…and their value lies largely in their ability to reduce uncertainty” [p.4]. It is also noted that “firms bolstered efficiency through financial innovation” [p. 5].

The introduction goes on to explain how finance contributed to business efficiency and growth. First, finance allowed firms the time and stable funding to exploit economies of scale and scope. Second, financial innovation often helped firms cope with and even take advantage of external economic shocks. Financial innovations also lowered perceived risks faced by investors and allowed better monitoring of managers. Finally, financial innovation also allowed better management of corporate resources and gave firms the ability to overcome market imperfections by internalizing high-cost market transactions. The rest of the introduction describes the development of the modern theories of asset pricing, agency costs, asymmetric information, and corporate debt policies. Curiously, in discussing the random behavior of market determined asset prices, this book cites the

1953 study by M.G. Kendall as the beginning of this recognition, ignoring the well-known and much earlier (19th century) work of Louis Bachelier and others (e.g., Bernstein, 1996).
Part I consists of three chapters that review finance in the pre-industrial world (actually just Europe). The two chapters in Part II cover the development of European finance during the era of industrialization. Part III traces the evolution of finance in Western Europe and North America into the modern era.

Chapter one describes the development of finance in Italy in the late middle ages and the early Renaissance period. This chapter has some excellent descriptions of international banking and how business financial structures in Florence and Venice of the thirteenth and fourteenth centuries were used to diversify risk and leverage returns on equity. However, it has very little about business financial arrangements prior to that period.

Chapter two covers the fifteenth through the eighteenth centuries and traces the rise, along with international trade, of the Joint Stock Companies, like the East India Company, as precursors to modern limited liability corporations. Chapter three covers the early development of public securities markets in England and western Europe in the eighteenth century.
Part II consists of two chapters and covers the development of corporate finance in the age of industrialization (late eighteenth to the mid twentieth centuries). Chapter four covers the financing of canals and railroads especially in the United States and chapter five describes the rise of equity markets and managerial capitalism in the first half of the twentieth century.

Part III also consists of two chapters and traces the evolution of corporate finance into the modem era. Chapter six focuses on the financing of large US companies in the post-war era until the oil shock of 1973, while chapter seven covers the rise of the conglomerate firm and the leveraged buy-out phenomenon in recent years. The epilogue is an essay on the relationships between environmental and firm-specific factors in explaining the evolution of corporate finance.

While this book does not break much fresh ground, it is a fairly comprehensive review of the history of Anglo-Saxon corporate finance. It is well written and seems reasonably well researched. In fact, as is the case with any other good book, it leaves us wanting more. For example, the focus on post-Pvenaissance Anglo-Saxon corporate finance in this book means that there are at least two important areas that are omitted.

First, there is relatively little on finance in times before the Renaissance. This is unfortunate especially since many aspects of modern finance were developed in the so-called Dark Ages (see for example Braudel, 1982; or the footnotes in Tuchman, 1978). Second, while even the English language literature has many excellent sources (e.g., Banerji, 1995; Chandler, 1990; Cizakca, 1996; Hirschmeier, 1964), there is practically nothing in this book on the development of Indian, Islamic, Ottoman, or Asian corporate finance. This latter omission is particularly unfortunate given that it is widely contended that even the non-Japanese Asian economy is on track to be larger than the North American or European economies in the next few years (e.g., Aggarwal, 1991; Kennedy, 1993). While North American hearts and minds are likely to remain largely in Europe, its wallets are increasingly in Asia, and it is necessary that American books and other publications include Pacific Asian perspectives.

On balance, these limitations are relatively minor quibbles, and this book is recommended for scholars and others interested in the historical development of modern corporate finance. In addition, this book would also be useful reading for any student of corporate finance. It could be, and perhaps should be, required reading for advanced undergraduate and graduate students in finance and accounting. In conclusion, this book is recommended reading as it is an excellent and very readable review of the extensive scholarly literature on the historical antecedents of modern North American corporate finance.

REFERENCES

Aggarwal, Raj. “Technology Transfer and Economic Growth: A Historical
Perspective” in T. Agmon and M. Von Glinow, (eds.), Technology
Transfer in International Business. New York: Oxford University
Press, 1991, 56-76. Bachelier, L. Theorie de la Speculation. Paris: Gauthier-Villars, 1900.
Reprinted in English in P. H. Cootner (ed.), The Random
Character of Stock Market Prices, Cambridge, MA: MIT Press,
1964: 17-78. Banerji, Arun K. Finances in the Early Raj. Newbury Park, CA: Sage,
1995. Bernstein, Peter L. Against the Gods: The Remarkable Story of Risk. New
York: John Wiley, 1996. Braudel, Fernand. The Wheels of Commerce. New York: Harper and Row,
1982. Chandler, Alfred D. Scale and Scope. Cambridge, MA: Harvard
University Press, 1990. Cizakca, Murat. A Comparative Evolution of Business Partnerships: The
Islamic World and Europe. Kinderhook, NY: E.J. Brill, 1996. Hirschmeier, Johannes. The Origins of Entrepreneurship in Meiji Japan.
Cambridge, MA: Harvard University Press, 1964. Kennedy, Paul. Preparing for the Twenty-First Century. New York:
Random House, 1993. North, Douglas C. “Structure and Performance: The Task of Economic
History” Journal of Economic Literature 16, No. 3 (September,
1978): 963-978. Tuchman, Barbara. A Distant Mirror. New York: Ballantine Books, 1978.