The Electricity Revolution and the Stock Market, 1885-1928

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

This project compares the ongoing Information Technology (IT) revolution with the Electricity Revolution (1885 - 1930). It focuses on the stock market, and on the role that the small firm played. Along with the CRSP panel, investigators have collected data on individual firms in the NYSE going back to 1885. Using these and other data from the curbmarket and other exchanges, the study asks if the stock market valuation of incumbent firms and the intensity of takeover activity during electrification behaved as they have so far in the IT era, and if we can expect a repeat of the 1929 stock market crash. Preliminary results suggest some key differences between electricity and the computer: 1) Computer use is spreading faster than electricity did. This may have been because the heavy industrial nature of early applications of electricity delayed the entry of new and smaller firms. 2) The decline and poor performance of incumbents associated with electrification lasted longer than in the case of IT. 3) The merger wave of 1899-1900 was less effective as a policing device than the hostile takeover wave of the early 1980's. These three differences probably arise because the capital market is now more efficient than it used to be, and because it makes the entry of small firms easier. And, these differences may be precisely why the current IT driven rise in the stock market may be sustainable, while the rise of the late 1920's was not. Finally, IT probably has a stronger skill-bias than factory electrification did. But as skilled workers were scarce in those days, the skill premium was as high in the early part of the twentieth century as it is today.