Credit Market Constraints and Financial Networks in Late Victorian Britain

Economic historians have debated whether imperfections in British capital markets caused a delay in adoption of the second industrial revolution technologies in Britain after 1870. Despite numerous studies, the economic history literature has not found a conclusive answer.  Using a data set of over 600 companies quoted on the London stock exchange between 1895 and 1904, this paper tests whether firms operating with second industrial revolution technologies were more financially constrained than other firms. Economic performances of credit market constrained firms should heavily depend on the access to informal sources of capital, and on tight and close relationships with the bank. Close relationships with the bank are proxied by geographical distance between the company and the bank. Access to informal sources of capital is measured by the number of titled people (Lords, Baronets, Knights) on the administration board of the company, and by managing directors’ affiliation to Freemasonry. My findings show that economic performances of firms operating with second industrial revolution technologies were strongly and positively affected by shorter distance to a bank and by the number of titled directors serving in their administration board. Affiliation to Freemasonry does not seem to have a significant impact on companies’ performances.