New update of Andrew Odlyzko’s railways collapse paper:
It is well known that the great Railway Mania in Britain in the
1840s had a great impact on accounting. This paper contributes a description and analysis of the events that led to the two main upheavals in accounting that took place then, and of the key role played by Robert Lucas Nash in those events. He was a pioneer in accounting and ﬁnancial analysis, providing studies on the ﬁnancial performance of railways that were more penetrating and systematic than those available to the public from any one else. His contemporaries credited him with precipitating a market crash that led to one of two dramatic changes in accounting practices that occurred in the late 1840s. Yet his contributions have been totally forgotten.
The collapse of the Railway Mania provides interesting perspectives on the development of capital markets. The accounting revolution was just one of the byproducts of the collision of investors’ rosy proﬁt expectations with cold reality. Shareholders’ struggles to understand, or, more precisely, to avoid understanding, the inevitability of ruin, have many similarities to the events of recent ﬁnancial crashes. The Railway Mania events thus provide cautionary notes on what even penetrating accounting and ﬁnancial analysis reports can accomplish. Railway share price behavior suggests that Nash’s contributions had a much smaller eﬀect than his contemporaries gave him credit for.