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EH.NET BOOK REVIEW 
 
Published by EH.NET  (January 1998) 
 
Jonathan Barron Baskin and Paul J. Miranti, Jr., _A History of Corporate 
Finance_.  New York: Cambridge University Press, 1997.  x + 350 pp. $29.95 
(cloth), ISBN:0-521-55514-0. 
 
 
Reviewed for EH.NET by Paul Harrison, Graduate School of International 
Economics and Finance, Brandeis University. 
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_A History of Corporate Finance_ promises a lot in its unqualified title 
and mostly delivers.  The book is a compelling combination of economic 
and financial theory, economic and business history, and the history 
of economic thought.  What it really does is consider modern theories 
of corporate financial and managerial structure in the context of history. 
The book has much to offer general economists and specialists in any number 
of tangential subfields.  It offers nuggets of insight into how the world 
works as well as a textbook-like ordering of events in business history. 
The conclusions of the authors will confirm what many historians already 
know, that institutions and path dependencies are crucial determinants of 
economic organization- history matters.  But there is also much here to 
comfort the modern theorist who is accustomed to having economic historians 
point out the inadequacies of over-applying the ceteris paribus assumption- 
the things financial theorists worry about do matter. 
 
The book proposes to trace the development of corporate finance from its 
medieval roots to its current realization in the form of modern corporate 
America.  This broad scope is both its strength and weakness.  The book's 
coverage is expansive and dizzying- competently encompassing more than 
seven hundred years of corporate structure.  However, perhaps inevitably in 
a world of scarce resources, this breadth trades-off for depth in 
significant ways.  Primarily, there is no room for more detailed case 
studies that the reader is often left wanting.  The value added of the book 
is in developing and analyzing common threads of inquiry across these 
disparate histories- in confronting old stories with fresh questions. 
This entails no new primary research, rather the authors rely almost 
entirely on secondary sources.  While I found this disappointing (the 
search for the uber-researcher continues), it seems appropriate given the 
broad evolutionary questions pursued. 
 
The book's goal is ambitious and commendable:  How does corporate finance 
theory inform our understanding of historical events and how can an 
understanding of historical events inform our corporate finance theory?  I 
see this approach as the application of filters to draw attention to 
factors which are not newly identified but which usually are ignored. 
However, before getting into the book we must assess what is meant by 
"corporate finance."  For the purposes of the book the authors identify 
"corporate finance" with two issues:  financing, the optimal use of debt 
and equity, and dividend policy, the optimal distribution of profits. 
 
The book is structured in three parts with seven chapters and an 
introduction and conclusion.  Unfortunately the introduction is notably 
weak and muddled, including an ill-fated attempt to cover all of modern 
finance theory, I advise future readers to skip it.  The first part, "The 
Preindustrial World" includes chapters on the Italian city-state 
corporations, the rise of joint-stock trading companies, and the expansion 
of public markets for investment securities.  This takes us from about 1275 
up to about 1800.  The second part, "The Rise of Modern Industry", takes us 
up to World War II.  It has chapters on "finance in the age of canals and 
railroads" which essentially covers the 19th century and on the rise of 
common stock financing during the early 20th century.  The final section of 
the book covers "The Transition to the Contemporary Era" with a chapter on 
"center firms" and another on conglomerates and leveraged buyouts. 
 
In general the book is strongest on the early material where financing is 
arguably the most important corporate input.  The transition period, in 
particular the industrial revolution, is given short shrift.  How and why 
was financing and corporate structure different in a world of invention and 
small-scale manufacturing?  In the modern period the focus is on how 
financing can make the corporation more efficient.  This considers only 
mature Fortune 200 firms.  I would have liked to have seen more attention 
paid to the type of business being done, rather than treating all firms as 
somehow the same.  Given that firms alter their debt/equity structure for 
greater efficiency, how do we explain why they have differing debt/equity 
ratios?  I would have liked to have seen some focus on the shift from a 
manufacturing to a more service oriented economy.  I would have liked to 
have seen a consideration of high technology firms (who often have no 
debt) and start-up firms. 
 
In conclusion I will relate the take-aways back to the author's two main 
corporate finance issues.  First, regarding financing, it is striking that 
while the book focuses on corporate finance the authors often spend more 
time on corporate structure.  This highlights the important endogeneity 
between the financing of corporate activity and the organization of 
corporate activity.  The key issues here (which are not independent) are 
the ones we would expect:  the cost of capital, agency problems, and 
informational quality and symmetry.  The authors show us how and why they 
matter in various settings and with what impact.  That is, we get to see 
some of the mechanisms at work.  Occasionally I was left feeling that more 
emphasis is needed on other outside factors- in particular on financial 
intermediaries and on the demand side.  Second, regarding dividend policy, 
the book has a little less to offer to our understanding.  It seems clear 
that dividends were an important part of the attractiveness of early equity 
securities, with the effect of making equity very debt-like.  This is in 
keeping with one of the book's main conclusions- debt has historically 
been preferred to equity 
 
Paul Harrison 
Graduate School of International Economics and Finance 
Brandeis University 
 
Paul Harrison is the author of a number of articles on historical stock 
markets and on the evolution of modern finance.  He is currently working  
on a book documenting the behavior and evolution of early stock markets  
and investors. 
 
 
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