Did J.P. Morgan's Men Add Value? A Historical Perspective on Financial Capitalism
NBER Working Paper No. 3426
The pre-WWI period saw the heyday of "financial capitalism" in the United States: the concentration of securities issues in the hands of a few investment bankers which had substantial representation on corporate boards of directors. This form of organization had costs: it created a conflict of interest that allowed investment bankers to heavily tax operating corporations. It also had benefits: investment banker representation on boards allowed bankers to monitor the performance of firm managers, quickly replace mangers whose performance was unsatisfactory, and signal to ultimate investors that a company was well managed and fundamentally sound. The presence on one's board of directors of a partner in J.P Morgan and Co. was associated with a rise of perhaps 30 percent in common stock equity value. Some share of the increase in value almost surely arose because investment banker representation on the boards of competing companies aided the formation of oligopoly. But the development of similar institutions in other countries that like the Gilded Age U.S. experienced exceptionally rapid economic growth-Germany and Japan are the most prominent examples-suggests that a substantial share of value added may have arisen because "financial capitalism" improved the functioning of financial markets as social capital allocation mechanisms.