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From the Archives

‘The Dry Rot of The Joint Stock System’ (The Spectator, 1895)

Visualizing History

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Sunday Reads

You may have about the controversial and wealthy businessman that launched a public takeover battle with one of America’s leading corporations. You might have heard people voice their concerns over said businessman acquiring a media/publication company.

Of course, I am referring about 19th century Robber Baron Jay Gould and his battle with Cornelius Vanderbilt for control of the Erie Railway company. Oh, Elon Musk also announced his formal offer to buy Twitter for $54.20 a share this week.

Jokes aside, the drama between Elon Musk and Twitter has contained so many bizarre twists and turns that there are endless speculations about what Musk’s hidden motive might be (“he’s playing 4D chess, bro”). Given Elon’s history of making announcements that don’t always match the facts, and being an expert in controlling the narratives in his favor, many investors are skeptical of whether Elon’s acquisition offer is something to take seriously.

Such concerns were fueled further by Musk’s comments at a TED event in Vancouver after publicly announcing his offer. When asked if “funding was secured”, Musk only answered that “I have sufficient assets”. So funding…. is not secured? With Elon, you never know!

One thing we do know, however, is that there are many people against billionaire Elon Musk controlling a social media platform like Twitter. We also know that such concerns are nothing new. This brings us back to Jay Gould.

This cartoon from 1882 depicts Robber Baron Jay Gould as owner of the Associated Press, passing out stories to various newspapers under his control (in other words, controlling the narrative). Gould’s wagon reads “Monopoly News Delivery”. While Elon Musk is no Robber Baron, when Gould acquired the New York World newspaper to gain favorable reporting, it was also wildly unpopular. Due to his scandals and prominent roles in fiascos like the infamous Gold Corner of 1869, which triggered a “Black Friday”, the public had an unfavorable view of Gould.

(Fun fact… Gould tried to recruit some Catherwood ancestor of mine into his Gold Corner scheme, but thankfully, Robert Catherwood did our family name proud:)

For example, this cartoon shows “how the place [Hell] will be run two years after Jay Gould’s arrival”. Gould is shown on the right, standing outside “The Office of Jay Gould – Successor to Satan”. Talk about bad press!

The point is, despite its prevalence and frequency throughout U.S. history, the American public generally dislikes the notion of wealthy businessmen/businesswomen controlling media outlets. The difference today is that for all of the genuine criticism one could levy at Musk, he is no Jay Gould. If we were in the Gilded Age, conspiracy theories about Elon Musk’s elaborate plan to pump and dump Twitter stock to profit would be plausible. There are many problems with how Musk has handled this Twitter saga, beginning with the issues with which form he originally filed when taking his stake in Twitter.

Yet, despite all his public antics and toeing the regulatory line, there is currently no evidence of him profiting from previous instances where his actions/words sent asset prices soaring. Bloomberg’s Matt Levine wrote:

“People keep emailing me to suggest that Musk might be doing some sort of “pump and dump,” where his bid is an elaborate ruse to push up the price of Twitter stock so he can sell at a profit. I do not buy this. For one thing, I think it would be tricky for him to sell while the market still expects a deal; he can’t trade while he has material nonpublic information. But more important, Musk just doesn’t operate that way. He has amply demonstrated his ability to manipulate the price of many financial assets — Tesla stock, Bitcoin, Dogecoin, Twitter stock, whatever — but I do not think he has ever used that ability to make a quick buck. If he comes away from this escapade with an extra, like, $500 million and no Twitter, what does that accomplish for him?”

As Levine points out, there is no questioning Musk’s ability to manipulate the price of financial assets (we all remember how Dogecoin traded in the leadup to Musk’s SNL appearance), but so far there is no proof that he has profited from these price swings. This all begs the question, though, are there historical examples where business executive and management teams manipulated prices and did take that extra step – profiting from their manipulations? Hell yes.

The Gilded Age & Insider Schemes

The 19th century is rife with stories of insider trading schemes and straight-up fraud perpetuated by management teams and executives. In fact, it was not uncommon for company directors to short their own company’s stock! This was not standard practice, mind you, but there are enough examples that make it clear this occurred fairly frequently. Consider this story of barbed wire tycoon John W. Gates:

“[Gates, President of American Steel & Wire Company] announced that business was soft, so he laid off workers and closed down plants. He also shorted the company’s stock, which went from the $60s to the $30s. He covered his short and then announced that business was better. He hired back the employees and opened the plants. Of course, he bought the stock in the $30s, making a tidy profit when the stock rose again.”

The following story is one of my favorite examples of shady robber baron schemes:

During the great Erie Railway war, which is covered more extensively in the article below, notorious robber baron Daniel Drew shorted Erie RR stock while he was acting Treasurer of the Erie RR. Drew “reaped in a fortune as stock prices fell from $90 a share to $50.”

By the way, this is the same Daniel Drew that implemented the famous “handkerchief trick” I’ve written about before:

“In order to get the price of the stock as high as possible before beginning to sell it short, he [Drew] visited a NYC club where stock traders congregated. Sitting down on a particularly hot day, he pulled a handkerchief out of his pocket to mop his brow. As he did so, a small piece of paper fell onto the floor… After he left, the other traders pounced on the paper, which just happened to contain a ‘bullish’ piece of news on the Erie. They then proceeded to frantically buy the stock.” (The Robber Barons)

Now that we’ve gone through some crazy examples of short selling, insider trading and other various schemes that occurred before the days of SEC regulation…

Let’s dive into today’s articles that dive even deeper on some of these schemes, but also provide helpful historical context on other themes surrounding Elon Musk’s drama with Twitter:

  • History and evolution of shareholder power since pre-Civil War America.
  • The history of “offensive shareholder activism”
  • Private information and how it moves share prices
  • The role of “network influences” for moving stock prices.

The Erie Railway War

Why This is Relevant:

While Elon Musk is certainly no Jay Gould, this fascinating story includes wealthy businessmen fighting for control of a large American corporation, early versions of poison pills (watered stock), and more.


“The plan was to flood the stock market with “watered stock.” In 1867. Fisk and Gould printed off thousands of stock certificates that were not legally certifiable. Unsuspecting brokers of Vanderbilt’s bought up the stock as fast as Fisk and Gould could print them. Fisk is reported to have said, “if this printing press don’t break down, I’ll be damned if I don’t give the old hog all he wants.” “The old hog” Vanderbilt caught onto the ruse but kept buying in the hopes of outlasting Gould and the others. But his financial resources were not bottomless, and Fisk, Gould, and Drew were able to draw upon the finances of the troubled Erie Railway. Vanderbilt bought himself a judge from the New York City political machine of Tammany Hall. The judge authorized the arrest of the Erie Railway directors for contempt. The trio of Fisk, Gould, and Drew fled to New Jersey, bringing with them all the corporate records and $7 million. Entrenched in Jersey City, the directors hired police and bodyguards.”

Visualizing History:

Notable Quote:

“[Daniel Drew] is credited with perfecting the short-selling of stock and introducing the concept of ‘watered stock.’ This is derived from ‘stock watering,’ a method by which cattlemen increased the weight of their livestock before being sold. Salt would be given to the cattle to make them thirsty. The cattle then would drink lots of water, thereby gaining weight. In the case of Wall Street, ‘watered stock’ was a means to artificially inflate the price of stocks, usually by fraudulent methods.

By the spring of 1866, Drew had been named treasurer of the Erie Railroad. He advanced the company $3.5 million in exchange for 28,000 shares of unissued stock and $3 million in bonds. He proceeded to sell short and reaped in a fortune as stock prices fell from $90 a share to $50.”


Offensive Shareholder Activism in U.S. Public Companies (1900-1949)

The ‘Spirit of Honesty’ haunts a corporate board room.

Why This is Relevant: 

Elon Musk has made his attempted acquisition of Twitter a very public saga. For example, Elon tweeted a poll asking if Twitter shareholders should ultimately decide whether or not to accept his offer and take Twitter private. Since this whole saga began a few weeks ago with the first announcement of Elon Musk taking a passive (then active) stake in Twitter, Elon has made it clear that he thinks Twitter needs to change. That said, this article looks back at the history of “offensive shareholder activism” from 1900 – 1949.


“‘Offensive shareholder activism’ involves buying up sizeable stakes in underperforming companies and agitating for changes predicted to increase shareholder returns. Though hedge funds are currently highly publicized practitioners of this corporate governance tactic, there has been no analysis of the extent to which managers of U.S. public companies were faced with challenges of this nature during the first half of the 20th century.

This paper correspondingly examines instances during this period where investors engaged in offensive shareholder activism, based on a hand collected dataset of proxy contests occurring between 1900 and 1949. Our findings indicate that offensive shareholder activism, while not commonplace, did occur and was considerably more prevalent in the 1930s and 1940s than in earlier decades. We explain our results by reference to a simple model of offensive shareholder activism and argue that the ebb and flow of takeover activity may have been the primary determinant of the trends we observe.”

Visualizing History:


A Long View of Shareholder Power: From the Antebellum Corporation to the Twenty-First Century

Why This is Relevant: 

As mentioned earlier, Elon Musk has made a point of arguing that Twitter shareholders – not the board – should decide whether to accept his acquisition offer. As Bloomberg’s Matt Levine pointed out, however, Elon could have approached this very differently if he really wanted to place power in the hands of Twitter shareholders:

“Traditionally, there are two ways to take a company private. You can propose a merger, which by law has to go to the board for approval; the directors consider the offer as fiduciaries for the shareholders, and if they approve then it goes to the shareholders for a vote. Or you can launch a tender offer, which does not have to be approved by the board; you make the offer directly to the shareholders, and if they all sell you their stock then you own the company. I am oversimplifying in various ways, and in modern U.S. mergers-and-acquisitions practice the differences are not nearly that stark…

But it is the case that Musk could put a lot more pressure on Twitter’s board if he announced an all-cash tender offer at $54.20 per share than he actually did by sending them a vague nonbinding letter. For one thing, a tender offer is generally viewed as more binding: If you send a nonbinding letter to the board you can always say “never mind”; if you send a tender offer to the shareholders you will have a harder time doing that…

In other words, if Musk actually wanted the decision on this deal to be made by shareholders, not the board, he could act like it. He has not! He is acting like he wants the decision on this deal to be made by a poll of his Twitter followers, which is not at all how M&A works.”

Elon’s public saga with Twitter has prompted questions over how much power company shareholders should wield versus management. This paper looks at the long history and evolution of shareholder power.


“For most of the twentieth century the conventional wisdom held — probably correctly — that shareholders in America’s large corporations were passive and powerless and that real power in a public corporation was wielded by its managers. Beginning in the 1980s, however, shareholders in the form of institutional investors started to push for a greater say in corporate decision-making. In the twenty-first century, hedge funds have upped the ante, fighting for major changes in corporations whose shares they own. Once-imperial CEOs have now become embattled, as they fight, but often lose, against activist shareholders demanding policy changes, new dividends, board representation, and even the sale or break-up of corporations. In short, things have changed.

This Article situates the present-day rise of shareholder power by taking a long view over the previous two centuries, moving beyond traditional accounts to reach all the way back to the beginnings of the American business corporation in the early nineteenth century, then following the story of shareholder power up to the present day. This broad view reveals the complicated and shifting nature of shareholder power, documenting how periods of greater shareholder power were interspersed with periods where shareholders had little power, how the focus of shareholder power has moved from controlling shareholders to autonomous managers, and how shareholder power has ebbed and flowed across the last two centuries. It thus not only provides the backstory to present developments, but suggests that what has been seen as a hallmark of American corporate capitalism — the relative powerlessness of shareholders — may only have been typical of a few decades in the middle of the twentieth century.”

Notable Quote:

“shareholder power in the nineteenth century most often took shape in battles between controlling and minority shareholders, whereas the concept in the twentieth century was framed by the paradigm of the separation of ownership and control, and a consequent struggle between dispersed shareholders and controlling managers. We now appear to have moved into a new era of shareholder power, where the struggle is increasingly between more aggressive and better-organized institutional investors and managers trying to stave them off.”


Insider Trading in 18th Century Amsterdam

Why This is Relevant:

By linking this article I am not suggesting that Elon Musk is engaged in insider trading. However, this whole Twitter episode has raised interesting questions about public and private information, disclosures, and share prices. Should investors have known more about the conversations regarding Elon’s board seat, and sooner? This article looks at private information and how such information is incorporated into share prices.


“Private information is central to our understanding of financial markets. There is substantial evidence to suggest that it has a significant impact on asset prices. However, the process by which private information is incorporated into prices is difficult to analyze empirically. By definition, private information is not observed directly. It is not clear how insiders or informed agents trade on their information and by what process their private signals are revealed to the market as a whole.

Theory offers two perspectives. According to one view, agents with private information act in a competitive fashion. They do not take their impact on prices into consideration. They trade right after they receive a private signal and they do so aggressively. As a result, the privately-informed immediately reveal (most or all) of their private information. According to the second view, insiders are strategic and take the price impact of their trades into account. They internalize that their profits fall as prices become more informative. This constrains their behavior. Trades are spread out over time. Price discovery – the process by which private information is incorporated into prices – is prolonged. Strategic behavior is not a sufficient condition for slow price discovery. Private signals also need to arrive relatively infrequently. If they arrive continuously, strategic insiders may find it optimal to reveal their current private information as quickly as possible.

This paper uses a natural experiment from the 18th century to examine the incorporation of private information into prices in unique detail. Specifically, I test for the strategic behavior of insiders. I also study the speed of price discovery. The evidence supports the original Kyle (1985) model. It suggests that 18th century insiders traded in a strategic way, and that private information was only slowly incorporated into prices.”

Notable Quote:

“the results of this paper are consistent with long-lived private information (I estimate that it took two weeks for a given signal to be incorporated into prices) and with insiders having monopoly power over their private signals. This may be different today. Insiders could have become more competitive. Alternatively, due to more advanced technology, private information may have become much shorter lived. This would have fundamentally changed the role of private information in markets – they may have become much closer to strong form efficiency. However, recent research suggests that this is not the case. Even after decades of fast technological progress, markets have not become more informative. For example, earnings surprises are as big as they always were. This suggests that long lived private information, held by monopolistic agents, is as relevant today as it ever was.”

Who Owned Citibank? Familiarity Bias and Business Network Influences on Stock Purchases,

Why This is Relevant:

Using Citibank’s stock in the 1920s as a case study, this article analyzes how relationship networks influence investor behavior, information acquisition, and (potentially) insider trading.


“We study factors influencing individuals’ decisions to purchase Citibank stock during the 1920s. Ownership was encouraged by proximity to New York and higher wealth. Lack of familiarity was also an important barrier.

The establishment of Citibank branches within a U.S. county or a foreign country was associated with a large increase in share ownership in that location, ceteris paribus. Within the New York City metropolitan area, individual characteristics related to wealth, knowledge, and one’s influence within the New York City Business network increased the probability of becoming a Citibank shareholder. Business associates in the network were an important influence on purchase decisions. Connections with Citibank officers and directors, or with people who had such connections, increased the probability of buying Citibank shares. Connections with other Citibank shareholders also increased the probability of buying Citibank shares. Connections with officers and directors of other large New York banks reduced the probability of owning Citibank, presumably because it increased familiarity with a close substitute for Citibank shares.

Network influence reflected more than the transmission of inside information; executives imitated other’s stock buying behavior, which provides evidence of the importance of familiarity for purchases. The role of some network influences, like other identifiable influences, became less important during the price boom of 1928-1929, perhaps reflecting the rising importance of other means of increasing familiarity during the price boom (i.e., media coverage).”

Visualizing History:

Notable Quote:

“Network connections were an important contributor to individuals’ purchase decisions. Having business connections with Citibank officers and directors, even indirectly, substantially increased the probability of buying Citibank shares. Furthermore, having a business connection with a Citibank shareholder who was not a Citibank officer or director also had an important positive effect on the decision to buy Citibank shares. The fact that both kinds of network connections mattered for the decision to buy shares indicates that influence reflected more than the transmission of inside information; executives imitated each other’s behavior, perhaps because connections with existing shareholders increased familiarity with Citibank stock.”



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