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The anatomy of a bubble company: the London Assurance in 1720

Journal: Economic History Review

Date: 2023

Author: Graeme Acheson, Michael Aldous, William Quinn

Abstract:
The London Assurance Company (LA), which incorporated during the bubble of 1720, experienced more dramatic price movements in its shares than the South Sea Company. This paper examines how incorporating during the bubble affected its long run performance. We show that the bubble in the Company’s share price was partly attributable to changes in market structure during the share issuance process. As a result of the bubble, the Company’s original subscribers, who had been curated for expertise and political connections, overwhelmingly exited during 1720 and were replaced by unsuccessful speculators. Analysis of LA shareholder behaviour up to 1737 suggests that this loss of shareholder expertise had detrimental consequences for the Company’s performance. These results demonstrate how a bubble in the shares of a newly created company can lead to an exodus of value-adding investors, damaging the company’s long-term prospects.

Link: Google Scholar

Background and Context

The South Sea Bubble of 1720

A major financial crisis in British history that affected numerous companies, with the London Assurance experiencing more dramatic price movements than even the South Sea Company itself.

London Assurance Company

Founded in 1719-1720 during the bubble, it was one of only two newly incorporated insurance companies to survive beyond 1720.

Research Approach

The study analyzes unique shareholder records, subscription receipts, and price data to examine how the bubble affected the company's ownership and performance.

Dramatic 5900% Rise and Fall in London Assurance Share Prices During 1720

  • London Assurance shares rose from £3 to £135 (a 5900% increase) in less than a year.
  • The price peaked on August 15, 1720, six weeks after South Sea Company shares peaked.
  • The crash occurred in three major waves, with shares losing 81.3% of value by November.

Market Structure Changes, Not Fundamentals, Primarily Drove Price Movements

Scrip Trading Dramatic Price Rise Transition Major Falls Share Trading Price Decline Receipt Book Closes Receipts Called In Price Peak Shares Issued
  • The entire price rise occurred while trading subscription receipts ("scrip"), not actual shares.
  • Largest price falls coincided with the transition from scrip to shares in August/September.
  • Scrip was easier to speculate with but created liquidity constraints as prices rose.

Unprecedented Mass Exodus of Original Investors Compared to Bank of England

  • Only 19% of London Assurance's original subscribers remained after one year, versus 86% for Bank of England.
  • Original subscribers specifically curated for expertise and political connections mostly sold out for quick profits.
  • This exodus was highly abnormal compared to other newly established financial institutions of the era.

Different Investor Types Showed Markedly Different Investment Behaviors

  • Financial industry professionals had the shortest holding periods, while middle class and women held longest.
  • 80% of female investors held for over one year, showing more conservative investment strategies.
  • Finance industry professionals were most likely to trade frequently for shorter-term gains.

Bubble Transformed Company Ownership, Damaging Long-Term Performance

1719 1720 1725 1737 Expert Investors Bubble Speculators Unsuccessful Speculators Passive Investors
  • By 1737, the average shareholder held for over 20 years, with 55% holding until death.
  • Loss of expertise combined with extreme shareholder passivity limited the company's ability to compete.
  • This ownership transformation explains why London Assurance underperformed private insurers for decades afterward.

Contribution and Implications

  • Bubbles can transform company ownership, causing an exodus of value-adding investors with expertise and connections.
  • Market structure significantly affects price dynamics, beyond just news about company fundamentals.
  • The ownership changes caused by bubbles can damage companies' long-term performance and competitive position.
  • Historical data on financial bubbles can provide insights into how modern speculative episodes affect corporate performance.
  • The research demonstrates how even surviving bubble companies can suffer long-term consequences from speculative episodes.

Data Sources

  • Price chart based on Figure 1 showing London Assurance share prices from December 1719-December 1720.
  • Investor retention comparison based on Table 6 comparing turnover between London Assurance and Bank of England.
  • Investment holding patterns based on Table 8 showing holding durations by investor occupation and gender.
  • Long-term ownership data based on Table 7 showing investment horizons of shareholders from 1720-1737.
  • Market structure SVG based on the authors' analysis of how scrip trading and transition to shares affected prices.