FINANCIAL DEPENDENCE AND FIRM SURVIVAL IN INTERWARBRITAIN

Was the London Stock Exchange (LSE) little more than a Dickensian den of speculation, or did itmake a contribution to industrial development in interwar Britain? The interwar stock marketlaboured under problems of weak disclosure, inadequate investor protection and ineffectiveunderwriting. New manufacturing industries were the most vulnerable to resulting asymmetricinformation problems. Drawing on a new database of IPOs on the London Stock Exchangebetween 1919 and 1938, I conclude that new manufacturing firms were finance-constrained.Consistent with the Rajan-Zingales financial dependence hypothesis, this result reflects the weakinterwar institutional environment. The disastrous IPO survival rates of the late 1920s providefurther evidence of this weak environment. Yet, when issue activity rebounded strongly in thefollowing decade, a dramatic improvement in survival ensued, due, in part, to the efforts of theLSE. This was an early example of the “light touch” regulatory approach for which London hassubsequently become renowned....