Foreign investment and infrastructure financing: railways during the first age of globalisation

The late nineteenth and early twentieth century is characterised as a time of rising international integration in goods and financial markets. Sovereign and railway securities were the top-most avenues of British capital flows during 1880-1913. Railways were risky ventures characterised by high capital intensity and significant sunk costs, and were therefore structured as emergent Build-Operate-Transfer schemes, with both public and private shades in ownership and management. Focusing on infrastructure finance as the key theme, the thesis draws on literature from finance and economic history to explore foreign investment in railway securities from fifteen countries. The thesis takes an investor's perspective, analysing the relationship between railway and government securities through the lens of country creditworthiness. In doing so, it explores three research questions. First, was the government guarantee a signal of government credibly committing to meet their obligations? Second, what were the determinants of yield spreads on railway securities and were there any commonalities with determinants on sovereign securities? Third, what was the dynamic relationship between returns on government and railway securities and how did they behave during times of crisis? Qualitative and quantitative methods point to two key results. First, the guarantee was a credible signal of government commitment and was the mechanism through which sovereign creditworthiness had a spillover effect on railways. Second, railways and sovereigns exhibited a time-varying relationship. However, crisis episodes such as the Barings crisis of 1890 significantly influenced the nexus between railways and sovereigns. Overall, a key result of the thesis is that investors took both sovereign and railway securities into account when forming perceptions of country creditworthiness. Current literature on the roots of creditworthiness during 1880-1913, rely exclusively on sovereign securities. This thesis expands the debate by looking at both sovereign and railway securities in understanding how market sentiment was shaped.