Investor Returns to Indian Railway Companies in theAge of High Imperialism ∗

Dan Bogart† Latika Chaudhary‡

May 2018

Preliminary. Please do not cite.

Abstract

Using annual data on Indian securities trading on the London Stock Exchange,we present new series on market capitalization, capital gains, dividend yields, andtotal returns of railway and non-railway securities from 1869 to 1929. Indian railwaycompanies floated multiple securities in London including dividend guaranteed shares,debentures and bonds, and common equity. We find shares of the original guaranteedrailway companies did not enjoy any capital gains in this period with British investorstreating them as bonds. Unlike guaranteed shares and bonds, Indian railway equitiesenjoyed significant capital gains, higher than those of non-rail Indian equities. Wefind dividend yields were comparable across securities and industries averaging 4 to8 percent for the entire period. While guaranteed securities have been criticized byBritish viceroys of India, Indian nationalists and subsequent scholars alike, we finddividend yields of such securities were comparable to railway corporate bonds of othercountries. And if anything they were lower than yields of Indian government bondstrading in London. We also conduct an event study using monthly data on returnsand find no evidence of abnormal returns in the three years leading to takeover of theoriginal guaranteed railway companies.

Keywords: Railways, Market Returns, London Stock Exchange.

JEL Codes: N7, O47, P52, R4

∗We thank Will Goetzmann for his help in accessing the IMM database maintained by Yale. And, wealso thank Richard Grossman for his patience in answering questions about the Yale-IMM database. Allerrors are our own.†Associate Professor, Department of Economics, UC Irvine, Email:dbogart@uci.edu‡Associate Professor, Graduate School of Business and Public Policy, Naval Postgraduate School,

Email:lhartman@nps.edu

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1 Introduction

What were the effects of European colonialism on the economic fortunes of its colonies? Alarge and growing literature continues to debate the answer to this question. One schoolof thought argues that European colonizers introduced extractive institutions benefittingthe colonizers at the expense of native populations. In this vein, Acemoglu, Johnson andRobinson (2001) argue that Europeans were less likely to settle in large numbers in colonieswith unfavorable disease environment and hence higher settler mortality. In such places,Europeans set up more extractive institutions contributing to worse economic outcomesthat may persist till today. Another school of thought highlights the positive effects ofthe exchange. For example, La Porta et al. (1998) argue the importation of British legalinstitutions was good for British colonies unlike French colonies that received a version ofFrench civil law. Unlike Acemoglu, Johnson and Robinson (2001), in the La Porta et al.world the identity of a colonizer is key at least for good legal institutions. Other scholarshighlight the positive effects of Europeans bringing their human capital and technology tocolonies (Easterly and Levine 2016, Ferguson 2003).

Such broad arguments that exploit differences across colonies are no doubt compelling.But they often overlook the nuances and historical details of colonial rule. Take British Indiafor example. While the disease environment was not favorable to European settlement, notall British institutional changes were “extractive”. In some regions, the British gave propertyrights to cultivators (“a good institution”), in others to landowners that were not cultivators(“a bad institution”).1 India inherited a version of common law, but one the British adaptedto local conditions and their understanding, or rather misunderstanding, of pre-colonial legalnorms (Roy and Swamy 2016). Indeed, the British did an abysmal job promoting health andeducation in India (Chaudhary and Lindert 2018), but their policies toward private industrywere market based. In particular, private firms did not worry about British expropriation.And, if anything, Indian firms were exempt from trade barriers within the British empire.Colonial policies were thus far from uniform in either direction (Roy 2014).

Our paper provides an important perspective on these issues by studying the performanceof Indian railway securities from 1869 to 1929. We focus on Indian railways because itsfinancing has been criticized by contemporaries, Indian nationalists and subsequent scholarsalike (Bell 1893, Sanyal 1930, Thorner 1955, Dubey 1965, Hurd 1983). In this view, Britishinvestors were the main beneficiaries because these securities were guaranteed a five percentdividend backed by the Government of India (GOI). Beginning in the 1850s, private British

1These were not property rights per se, rather rights to collect and pay taxes. See Roy and Swamy (2016)for details on legal issues surrounding property rights under the Raj.

companies built the first Indian railways using London capital markets for financing. Theywere joint stock companies that entered into contracts with the Secretary of State for India,a member of the British Cabinet responsible for administration in India. Guarantees were akey feature of the contracts. The GOI gave a 5 percent guarantee on the capital at a fixedexchange rate. If net earnings as a share of capital fell below 5 percent, the GOI paid thecompany the difference up to 5 percent.

Early railways did not earn five percent and Indian tax payers paid for the guarantees.These payments continued well into the 1860s and in few cases the 1900s. But, the largeabsolute payment of 38 million pounds between 1849 and 1900 never exceeded 0.5 percentof national income in a single year (Hurd 1983). Notwithstanding the rhetoric of guaranteesbenefiting British investors, the key question is whether these securities offered higher returnsthan other securities trading in London. Was the intention of colonial policy to benefitBritish investors at the expense of Indian tax payers, or were guarantees necessary to raisefinancing for Indian railways in a competitive landscape. In particular, how did returns tothese guaranteed Indian railway securities compare to other Indian railway securities, tonon-rail Indian securities with no guarantees, and railway securities of other countries.

We answer these questions using monthly data from the Investors Monthly Manual onIndian securities trading in the London Stock Exchange between 1869 and 1929. We firstconstruct the market capitalization of Indian railway securities by type - the original guar-anteed companies, corporate bonds and debentures, and common equity. Then, we comparethe market capitalization of railways to other Indian industries.

Non-rail industries account for 45 percent of Indian issues trading in London, yet railwaysaccount for 80 percent of market capitalization in these decades. Most railway securities arenon-equity. For example, the shares of the original guaranteed companies were guaranteeda five percent dividend, similar to bonds with their fixed interest rates. While guaranteedsecurities represent 69 percent of railway market capitalization in 1869, their share declinesin the 1880s as the GOI takes over the original guaranteed companies. By 1929 they accountfor less than 2 percent of railway market capitalization. Other non-equity sources such asdebentures and bonds become the main channel for financing railways in the early 20th

century. Equity financing of railways remains small early on, but accounts for 50 percent ofmarket capitalization by 1929. In contrast, non-rail industries are more likely to be financed50 percent equity and 50 percent debt throughout.

Using security prices trading at the end of January, we construct unweighted and marketcapitalization weighted annual returns to Indian securities. We find almost zero capitalappreciation of the guaranteed railway securities. Rather, their returns come from dividends.

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Their capital appreciation trends mirror those of corporate bonds in railways and non-railIndian industries. Were guaranteed dividends higher than other options? Yields to railwaycorporate bonds in the rest of the world average 4.9 percent compared to 4.4 percent forguaranteed railway companies. But investors may have viewed the dividend guaranteedsecurities as lower risk perhaps than railway bonds in other countries. However, dividendyields for Indian government bonds trading in London average 4.7 percent, again higher thandividends of guaranteed companies. Unlike the strong claims about guarantees benefittingBritish investors, our analysis finds British investors had many options. Indian guaranteedsecurities were far from the most low risk-high return security trading in London.

How did Indian railway equities perform? They enjoyed higher capital appreciationcompared to non-rail Indian equities, but also paid lower dividends. Their performance wasless volatile than higher risk transport equities of Africa and Latin America. Rather, theirperformance tracked UK transport equities.

In the final section of the paper we conduct an event study surrounding the GOI takeoverof the original guaranteed companies. Debates surrounding guarantees dominated discus-sions in Britain and India in the 1870s. British viceroys were among the harshest contem-porary critics. They argued guarantees were too costly and the GOI was better equippedto finance railways. Other observers argued the Indian economy was inadequate to supportlarge infrastructure projects. They emphasized the difficulty of raising British capital fora risky Indian infrastructure project without an explicit guarantee noting that attempts tofinance private railways without guarantees failed (Bell 1894, p. 73). In 1869, the GOI firstpushed to end guarantees, but failed. But, in the late 1870s they gained their first victory bytaking over the largest and most profitable railway company, East Indian. More takeoversfollowed until 1907 when the last of the original guaranteed railways became governmentowned. The takeover procedure followed terms of the original contracts. Investors were paidthe average stock price in the 3 years prior to the takeover date. This was public knowledge,especially after the first takeover in 1879.

In our event study, we test for abnormal returns in the three years leading to takeoverof the original guaranteed companies. One might imagine that investors feared subsequentlosses and the stock price dropped. There could also be a gaming of stock prices to extractmore from the government. We find no evidence on average of significant cumulative abnor-mal returns in the 3-year window before takeovers. East Indian, the first British companytaken over in 1879, has mild positive cumulative abnormal returns in their 3-month windowbefore takeover, but the next company, Easten Bengal, has mild negative abnormal returnsin their 3-month window before takeover. Apart from them, we find no significant cumu-

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lative abnormal returns across railways and event windows. That said, individual returnsare more volatile in the 3-year window before takeover perhaps on account of uncertaintysurrounding the GOIs intentions.

Our paper contributes to three literatures. First, this paper contributes to a large eco-nomic history literature on historical UK and overseas equity indices, including many papersusing the IMM (Grossman 2002, Grossman 2015, Goetzmann and Ukhov 2006). Similar toUK equities (Grossman 2002), we find dividends account for most of the equity return toIndian railways and non-rail industries. Using Grossman’s (2015) equity returns by regionand sector, we find Indian railway equities underperformed transport equities in Africa andLatin America. In contrast, Indian railway equities follow the ebbs and flows of UK trans-port equities trading in London. Other scholars have noted that colonies enjoyed preferentialaccess to international capital because they could borrow at similar rates as the metropole.We find British investors viewed Indian railway equities as perhaps not too dissimilar fromUK transport equities.

Second our paper contributes to a small and growing literature in Indian economic historyon the nature and divergence of European and Indian firms in colonial India (Roy 2014,Gupta 2014). Our study focuses on the performance of the European firms concentratedin export industries such as railways, jute and tea where Europeans enjoyed comparativeadvantage. Third and finally, our paper relates to a large literature in history and economicson the effects of Empire (see Roy 2012 for discussion and references). Our focus is theguarantee system, an important regulatory colonial policy. As we argue in other work(Bogart and Chaudhary 2016), guarantees were not without their problems. In particular,they weakened private incentives to cut costs. But in terms of their performance, thesesecurities offered close to zero capital appreciation and their much maligned dividend yieldswere comparable and even lower in some cases than yields to railway corporate bonds in therest of the world, and to safer Indian government bonds trading in London.

The rest of the paper is organized as follows. Section 2 provides a brief background onIndian railways. We describe the IMM data in Section 3. Section 4 discusses the returns toIndian securities. Section 5 conducts an event-study analysis and Section 6 concludes.

2 Background on Indian Railway Companies

Four phases mark the construction of colonial Indian railways. In the first phase from 1850to 1869, private British companies constructed and managed trunk lines under a publicguarantee. In the second phase, the GOI constructed railways in the 1870s. Beginning in

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the 1880s, the third phase, new public-private partnerships emerged between the GOI asmajority owner and new private British companies. And, in the fourth and final phase, theGOI began a take over of rail operations leading to complete nationalization over time.2

Two private British companies, the East Indian and Great Indian Peninsula built thefirst Indian railways in the 1850s. While the East Indian sought to connect the port ofCalcutta in the east to Delhi in the interior, the Great Indian Peninsula worked on railwaysconnecting Bombay in the west to Delhi. Six more British companies followed in the 1850sand 60s. Although these companies negotiated individual contracts with the Secretary ofState for India, the contracts shared common features. Bogart and Chaudhary (2012, 2016)describe these contracts, but we review the key details here.

Such early companies were set-up as joint stock companies under the oversight of boththe India Office in Britain and the GOI. While the GOI gave the companies free land, theyhad authority on route placement, gauge and other construction decisions. Guaranteeddividends were the most controversial feature of these contracts. The GOI gave a 5 percentguarantee on the share capital at a fixed exchange rate for the entire duration of the 99-year contract. If the net earnings (i.e., gross earnings minus working expenses) as a shareof capital was less than 5 percent in any year, the GOI compensated the company thedifference up to 5 percent. Such guarantee payments were treated as debt. When annualnet earnings exceeded 5 percent, the company had to repay any past guarantee paymentsby transferring half of their surplus profits over 5 percent to the GOI. After past guaranteepayments were paid off, the company received the entire surplus profits. Company founderssuch as Rowland Macdonald Stephenson, the managing director of the East India, arguedguarantees were necessary to entice British investors. Indeed, the East Indian and GreatIndian Peninsula tried to raise capital in London in the 1840s without a guarantee and wereunsuccessful.

Apart from guarantees, the companies could return the railways to the GOI with a six-month notice, while the GOI could buy the railways on the 25th or 50th anniversary of theiroriginal contract. If the GOI chose to buy the railways, they paid the share-holders theaverage market value of the shares trading in London over the past three years. Under thecontracts, companies could also float debentures (i.e., bonds) to finance further extensions.Some but not all the debentures could be converted into shares.

Contracts in hand, these guaranteed companies, as they came to be known, floatedmultiple securities on the London Stock Exchange. Much of the capital was raised throughshares backed with the dividend guarantee, but debentures became important over time.

2See Sanyal (1930) for a detailed overview of the regulatory history of Indian railways.

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Table 1 lists the contract dates of the original guaranteed companies with a snapshot of theirowners as of 1869. Shareholders accounted for 89 percent of company owners with debentureholders accounting for 11 percent. Almost all the share-holders (97 percent on average) wereregistered in England. Even among the small number of shareholders registered in India,44 percent were Europeans. A board of directors in London, including the heads of Britishcompanies with Indian interests, retired members of the British military and other membersof the British financial elite were common shareholders.

As argued by contemporary critics, guarantees created weak incentives to cut construc-tion costs and improve efficiency (Bell 1894). And, the early Indian experience supports thisview. Many lines were unprofitable in the 1850s and 1860s forcing the GOI to make guar-antee payments to foreign shareholders. On account of their less than stellar performance,the GOI began to take over these guaranteed companies as their contracts came due in thelate nineteenth century. Other than three companies taken over on their 50th anniversary,the rest were taken over on their 25th anniversary.3 In five cases the GOI signed new con-tracts with directors of the former companies to operate their railways after takeovers. Here,the GOI purchased three-quarters to four-fifths of the shares of the original company. Onpurchase, the former share-holders were paid in the form of annuities that also traded onthe London Stock Exchange.4 A reconstituted company controlled the minority of sharesranging from a quarter to a fifth and managed operations under a 25-year contract. Thereconstituted company split the profits with the GOI in proportion to their capital share.

In the case of three guaranteed companies, the GOI took over ownership and operationat the time of purchase.5 These lines were operated alongside other GOI owned lines thatwere constructed in the 1870s as official opinion soured away from private British companies.However, the experiment with complete state owned and operated railways was short-lived.In the 1880s, a new public-private railway entity emerged. Such projects involved theGOI owning a majority of the capital with a private British company owning the rest. Thecompany managed railway operations and split the profits with the GOI again in proportionto their capital share. These companies also raised capital in London using equity. Unlikethe original guaranteed companies, they were backed by lower guarantees for shorter periods

3Three companies, Great Indian Peninsula, Bombay, Baroda and Central India, and Madras were takenover on their 50th anniversary because they renegotiated their contracts in 1869. As part of the deal theSecretary cleared company debts and voided the Government’s right to repurchase at the 25th year of thecontract. In return companies had to share half of all surplus net profits (i.e., above the guarantee) withthe GOI from that point forward.

4The two exceptions were Bombay, Baroda and Central India, and Oudh and Rohilkhand where noannuities were floated after takeover. In this case, the shareholders were paid off at takeover.

5After takeovers the Government chose to operate Eastern Bengal, Sind, Punjab and Delhi, and Oudhand Rohilkhand railways.

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of time. The public-private partnership model was common up to the 1920s when the GOIbegan taking over the operating companies leading to the eventual takeover of all railwayoperations.

On the regulatory side, guarantees have been criticized by contemporaries and subsequentscholars of Indian railways (Sanyal 1930, Thorner 1955, Hurd 1983). In particular, scholarsargue guarantees are yet another example of extractive colonial policy that benefited Britishshareholders at the expense of Indian taxpayers. But, India was not unique in offeringguarantees. Railway investors in Brazil, France and Russia among other countries insistedon guarantees (Eichengreen 1995). In fact, Brazilian railway companies received 7 percentguarantees, 2 percentage point higher than Indian guarantees. As we argue in Bogart andChaudhary (2016) guarantees were necessary to build the early Indian rail network. Thatsaid, much of these debates have been theoretical without any quantitative analysis of Indianrailway securities trading in London. We address this important gap in the literature bystudying the performance of different types of Indian railways securities, comparing themto other Indian industries trading in London, and then conduct an event study of the stockmarket returns of the original guaranteed companies in their 3-years before takeover.

3 Data

Our main source of data are the Investors Monthly Manual (IMM) digitized by the In-ternational Center for Finance at the Yale School of Management. These reports containthe monthly universe of securities traded on the London Stock Exchange from 1869 to 1929.They include the monthly opening price, high, low and end price of each security in additionto dividends and capital information. Apart from British securities, many foreign securitiesincluding colonial government bonds traded on the London Exchange. While economic his-torians have extensively studied British and foreign equities using these data (for example,Grossman 2012, 2017), we are the first, as far as we know, to study Indian securities.

We made a few changes to Yale’s IMM database that we describe here. While Yale’svariables can be matched to published IMM series, Yale coded some new variables such ascountry code and type of security. As noted by Grossman (2012, 2017), the instructionsgiven to the coders are not included in the database making it hard to interpret some series.Unlike other cases, the country code in our case is self-explanatory, which we use to focus onsecurities related to India and Bangladesh.6 Our conjecture is Yale used the primary place

6Colonial India included the present day countries of India, Pakistan and Bangladesh. In the IMM,railways in present day Pakistan are recorded as India, while those in Bangladesh are recorded as Bangladesh.We exclude British Burma and its associated Burma Railways because it was separated from colonial India

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of business to code the country because Indian railways trading in London were Britishcompanies operating in India.

Yale coded securities as one of four types (1) government bond, (2) common equity, (3)corporate bond, and (4) preferred stock. As our focus is on companies, we drop the smallnumber of government bonds. We also drop any security not traded in British pounds, whichincludes an Indian government security traded in rupees and a tea company. In general,rupee companies traded in the smaller Indian exchange in Bombay.

Although Yale does not explain how the securities are binned by type, we believe theyuse the following rules based on our analysis of Indian security names and Grossman (2015,2017). Any security with an interest rate or the word “debenture” in their name is coded asa corporate bond. Indeed, only one debenture security is coded as a preferred stock, the restare corporate bonds. Any security with “preferred” or “preferred shares” is coded as preferredstock. The rest are coded as common equity. As we note in Section 2, guaranteed railwaycompanies floated shares that were backed by a GOI dividend guarantee. Yale codes threeguaranteed securities as common stock, the remaining are coded as bonds. Interestingly, forthis latter group of guaranteed securities Yale added the word debenture or bond to theirissues names. In the published IMM reports these securities are listed as company namefollowed by “guaranteed 5 percent by Indian Gov”. In the 1880s, the second generation ofrailway companies were set-up as public-private partnerships with lower guarantees offeredfor fewer years such as Bengal Central and Bengal and Northwestern railways among others.Yale codes them as common equity.

On account of these issues, we code the railway securities as (1) guaranteed securitiesof the original railway companies backed by the 5 percent GOI dividend guarantee (2)debentures and bonds - any railway security with the word “debenture” or “bond” in theirissue name, and (3) the rest namely common equity and preferred shares, which includescompanies backed by lower dividend guarantees.7 Since we are less familiar with otherIndian industries trading in London, we follow Yale’s coding and bin then as (1) corporatebond and (2) common equity or preferred stock.

For each security Yale provides a four-digit Standard Industrial Classification (SIC) codealong with a broad industry classification of (1) Government Bond (2) Banks (3) Railwaysand (4) Miscellaneous.8 Instead of using Yale’s coding, we create industry codes specific

in 1937 and ruled as a separate colony up to its independence in 1948.7After the GOI bought the original guaranteed companies, their shareholders were paid off via annuities

that traded on the Exchange. We are unable to calculate the market capitalization of these annuities becausetheir series are non-standard from other securities. So we exclude annuities from our analysis.

8Yale refers to (1) as Stock. In the case of Indian securities, category (1) is always government bonds.

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to the Indian case. First, we follow Yale’s railway coding except for “Assam Railways andTrading Com.” Assam railways started as a railways company before diversifying into trade.We code it as railways, while Yale does not. Second, we use the security name to code 5 otherindustries: tea; jute; utility - electric, gas, telegraph, iron; gold/mine; and miscellaneous.9

We use these data for two analyses - first, we construct the market capitalization ofrailway securities and compare them to the non-rail sector, and second, the event study,which tests for abnormal returns in the guaranteed stocks of the original railway companiesin the years leading to their takeover. For the event study, we use the complete monthly data.But, in constructing the market capitalization and total return series of Indian securities,we follow Grossman (2015) and focus on the January data. While the IMM reports themonthly open, end and high price, we use the end of January price. If it is missing, weuse the monthly open price. We also drop month-year observations where the security priceincreased by more than three times over the previous January. These account for 6 percentof security-year observations. We inspected these large swings and in almost all cases theyappear to be errors.10

To calculate market capitalization, we used the series “For equity: the total shares ofcapital; For fixed income: the total outstanding.” In the case of shares, the market capi-talization of a security is the number of shares multiple with their market price. But forrailways and other industries, this series is often reported as the market capitalization atpar, often 100 (Grossman 2017).11 IMM denotes these equities as “stock” in the variable“the amount per share of capital” or in the security name. Such series are also prefixed witha pound symbol. We calculate their number of shares by first identifying them based onwhether their amount per share is recorded as “stock” and by checking the published IMMreports for pound symbols before the “total shares of capital” series.12 Then, we divide “totalshares of capital” with their reported capital at par. If their capital at par is missing, weassume a par value of 100.

IMM changed the reporting of dividends in this period. While in later decades theyreport the dividend along with the date it was paid, in the 1860s they publish the last fourdividends paid (for example, “4 6 7 5”) followed by the months in which they were paid (for

9Miscellaneous includes a rubber company, tramways among a few others. In the future, we will also usethe SIC code to create sectors comparable to other work.

10In two cases that we retain, these swing appear real as they were low priced securities with largefluctuations.

11According to Grossman (2017), “For equities that were classified as “stock”, a common designation amongolder corporations such as railways, canals and waterworks, the “amount of stock” indicates the total marketcapitalization of the issue at par, typically 100.”

12Before 1889, a missing capital amount per share was a “stock”.

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example, “Jan, July”). Unfortunately, the IMM gives no explanation of whether the firstnumber in the string of reported numbers is the most recent dividend. We inspected thedividend series for some securities in the months before and after a dividend was announced.In some cases, the first number is the most recent dividend paid by the company, but inother cases the fourth number appears to be the most recent dividend. On account of theseambiguities, we use the series “last two dividends at latest price per cent” that IMM beganreporting in 1879.13 Similar to Grossman (2015, 2017), we believe the dividend yields shouldbe interpreted with caution given the reporting problems.

Figure 1 shows the total number of Indian securities trading on the London Stock Ex-change from 1869 to 1929. The y-axis to the left shows the number of issues, while they-axis to the right shows the percentage of rail issues to total issues and the percentage ofrail non-equity issues to total non-equity issues. Total number of Indian securities increasedfrom 56 in 1869 to 130 in 1929. While railways dominated Indian issues early on accountingfor 80% of total issues in 1869, they declined to just under 40% by 1929.

Most early securities were not common equity. Rather, they represented guaranteed13We constructed the dividend yield using the last two dividends and the latest price to asses the accuracy

of this published dividend yield series. Although our series does not exactly match the published dividendyield, it is very close and shows the same temporal patterns.

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shares of the original railway companies and their bonds, which together were 46 issues in1869. A handful of tea companies, an iron and coal company among others made up theonly 10 equity securities of 1869. But, the picture began to change in the 1890s as moreequity financed, non-rail, companies came on the scene. Within railways, there was also ashift to more equity issues with the share of rail non-equity issues as of total non-equityissues declining from close to 100% in 1869 to just under 80% in 1929. Indian equities werea tiny share of total equity issues trading on the London Stock Exchange. Indeed, Indianequities went from just 1% of total equity issues to 7% between 1869 and 1929.

Total issues are one measure of size, market capitalization (number of shares multipliedby price) is another. Figure 2a shows market capitalization of Indian securities. Total marketcapitalization increased from 90 million pounds in 1869 to just under 500 million poundsin 1929, which represents 8% of Indian national income in 1929. Up to the 1920s, muchof the market capitalization was in non-equities such as bonds, debentures and guaranteedsecurities of the early railway companies. But equities became more important in the 1910sand 1920s. Unlike total issues, market capitalization suggests equities did not match thesize of non-equities.

Up to the 1890s, over 90 percent of market capitalization was in railways. But thischanged in the late 1910s with large declines in railway capitalization as the last of the old

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guaranteed companies were taken over by the GOI. Again a majority of non-equity marketcapitalization was railways, a pattern that remained true for this entire period. Figure 2bshows market capitalization of Indian railways by security type. The original guaranteedcompanies dominate the landscape in the 1860s and 70s with a market capitalization ex-ceeding 100 million pounds in the mid-1870s. But, debentures and bonds became the mainsource of financing railway extensions in the 1900s accounting for around 27 million poundsin market capitalization as of 1929. Equity financing matches debt after the takeovers ofthe guaranteed companies, but it remains small for most of this era averaging 18 millionpounds. Unlike railways, equities are more important in other industries averaging 50% ofmarket capitalization from 1869 to 1929 albeit with large swings.

Figures 3a and 3b show the industry breakdown of total issues and market capitalization.Apart from railways, other industries trading in London were tea companies, jute companies,gold mines and utilities (electric, gas, telegraph and iron). Missing from this list is banksand manufacturing companies. Cotton textiles and other manufacturing concerns managedby Indians did not float securities in London. Rather, Indian firms trading in London wereconcentrated in export industries where Europeans enjoyed a comparative advantage. Figure3b on market capitalization by industry again highlights the importance of railways. Unlikeissues, the market capitalization of tea and utility companies is tiny compared to railways

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picking up somewhat in the 1920s. We turn next to the performance of Indian securities.

4 Returns to Indian Securities

We follow the standard approach of constructing equity returns even though we recognize oursecurities include corporate bonds, guaranteed stock and preferred shares. Indian railwaycompanies were backed in some fashion by a GOI guarantee, so their securities had debtlike features even when they were common equity.

We construct the total returns to holding any security as the sum of capital gains anddividend yield. In any year, t, the capital gain is measured as the increase in the value ofthe security as of January compared to the previous January namely:

(Pt − Pt−1)/Pt−1

Here, Pt is the price of the security in year, t. Dividend yield is normally calculatedas Dt/Pt−1 where Dt is the annual dividend paid to shareholders. In our case, we use thereported dividend yield series that begins in 1879. As a result, we construct capital gainindices from 1869 to 1929, but total returns from 1879 to 1929.

We average the individual capital gains across securities and report annual capital gainsby industry and type of security. An unweighted average, however, gives equal weight to big

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and small companies and could be misleading if prices of smaller companies say are morevolatile than those of larger companies. So we also report weighted averages using marketcapitalization as weights. The series weighted by market capitalization gives more weightto larger companies and their associated price fluctuations. While scholars using these dataalso report weighted series using paid-up capital (Grossman 2002, 2015), we are unable touse paid-up capital as it is missing for many Indian securities.

Table 2a reports the capital gains, dividend yield and total return for all railway securitiesfrom 1869 to 1929, while Tables 2b-2c report the series by railway security namely guaranteedcompanies, corporate bonds/debentures and equity. In the case of railway equities, we haveno equities trading between 1877 and 1882. Hence, in the graphs of capital gain indicesdiscussed below, we use the average capital gain across all railway securities for those years.We follow the same rule for the series on the original GOI guaranteed securities where wehave no price information between 1917 and 1920.14

Figures 4a and 4b report weighted and unweighted capital gain indices from 1869 to 1929.Similar to Tables 2a-2d, we report the indices for all railway securities, guaranteed securities,corporate bonds/debentures and common equity. Several patterns stand out. First, the

14The only Guaranteed company that survives past the 1910s is the Nizam’s Guaranteed Company – thelargest Princely State rail company owned by Hyderabad Princely State.

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returns to holding Indian rail equity were significantly high in this period compared tobonds. Here, the key periods of growth were in the 1880s driven by Southern Mahratta andAssam railways, and then again in the 1920s. Indeed, the 1920s were a period of tremendousgrowth for foreign equities trading in London (Grossman 2015). And, India was no outlierthought returns to Indian rail equities trailed behind African equities trading in the 1920s.

Second, the returns to holding shares of the original guaranteed railway companiesmatched those of their corporate bonds. Investors in these securities saw limited poten-tial for growth and high earnings. British markets correspondingly treated them as bondsrather than equities. In theory, we would expect non-equity securities to have lower returnsand volatility compared to equity. India’s railway experience bears that out with guaran-teed securities and corporate bonds showing almost no capital appreciation. Rather, Britishinvestors were handsomely rewarded for taking on the more risky railway equities.

In figure 4b, we see the weighted capital appreciation for rail equities was even largersuggesting bigger companies were driving much of the increase. Assam Railways and TradingCo. is one such company, whose share price increased from 47 pounds in 1922 to 146 poundsin 1926, making it to 232 pounds by 1929. That said, we observe similar ups and downs

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across the weighted and unweighted series. Not all the companies floating equities in Londonsurvive the entire period. Hence, the equity index is likely to be biased upwards on accountof positive selection of surviving companies. In future work, we plan to follow the equitiesof companies that survive this entire period to assess the extent of survivorship bias on thereturn.

In figure 4c we show the capital gain indices for just the guaranteed railway securitiesand corporate bonds on a smaller scale. Beginning in the 1880s the GOI began to takeover the original guaranteed companies converting their shares to annuities at the time oftakeover. So the securities in the guaranteed series are changing over time. Moreover, theindex after 1908 corresponds to the capital appreciation of just the Nizam’s company. Figure4c suggests these guaranteed securities enjoyed marginal growth till the 1900s after whichthere was no uncertainty among British investors and interested parties in India that theGOI would take over the remaining companies.

Figures 5a and 5b show the weighted and unweighted dividend yields for Indian railwaysby security type. Dividends range from 4 to 8 percent with dividends in the 1920s lying onthe higher end of the range. Yields for corporate bonds and guaranteed securities average4.3 percent compared to 5.5 percent for equity. Unlike the large differences in the capitalappreciation, dividend yields seem to track across equity and non-equity issues with railway

16

bonds and guaranteed securities offering marginally lower dividends. Weighting does notchange the picture suggesting that big and small companies also paid similar dividends. TheNizam’s guaranteed company accounts for the big spike in 1921 when their dividend yieldincreased to 12 percent before coming down in the next few years. Indian railways matchedthe world where dividend yields for foreign and British equity ranged from a high of 6.6percent in Australia to 5.3 percent in the UK (Grossman 2015).

Figures 6a-6b plot the capital gain indices and dividend yields for non-rail industries.Comparing the unweighted series in Figure 6a to the market weighted series in Figure6b reveals interesting differences. While equities of bigger companies enjoy more capitalappreciation, the dividend yields of smaller companies are higher. Similar to railways,corporate bonds in other Indian industries saw no capital appreciation. While equities innon-rail industries saw modest increases in the 1880s and 1890s, capital appreciation atleast among larger companies was higher in the 1920s. Unlike railways, equities had higherdividend yields in the non-rail sector compared to corporate bonds. Dividend yields forequities averaged 7.4 percent compared to 5.5 percent for bonds. Higher yields in thesenon-rail industries likely capture their higher risk compared to low risk traditional andestablished industries such as railways.

In summary, railway equities enjoyed higher capital appreciation, but paid lower div-

17

18

19

idends compared to non-rail equities. Unsurprisingly, corporate bonds showed no capitalappreciation in rail and non-rail industries. How did Indian rail equities compare to othercountries? Figures 7a-7b plot total returns to Indian rail equities compared to transportequities in other parts of the world constructed by Grossman (2015). Both weighted andunweighted series are similar, so we focus on the market weighted series here. Indian railequities are less volatile than those in Africa and Latin America. But, Indian equities trailAfrica and Latin America where equities enjoy a few peaks in the 1890s and 1900s. Turningto the developed world, Indian equities are also less volatile than North American trans-port equities. If anything, Indian railway equities move in sync with those of UK transportequities. Indeed, the effect of Empire is clear and strong.

Much contemporary writing and subsequent nationalist critiques of colonial policy haveblamed the structure of guaranteed railway companies. On account of guaranteed divi-dends, the argument is these companies helped British investors at the expense of Indiantax-payers. Our analysis of their performance, however, suggests otherwise. In terms ofcapital appreciation, these securities were largely worthless - low risk but with no capitalappreciation. And, in terms of dividends, the yields to railway corporate bonds in othercountries were higher at 4.9 percent compared to 4.3 percent in India. British investors hadmany choices. Indian railways were just one among the many profitable securities tradingin London.

5 Event Study

Event studies are used to test how investors respond to different types of firm-specific ormacro events. Underlying the methodology is the assumption that capital markets areefficient and a firm’s stock price captures all the information that is likely to influencefuture earnings. Most event studies for example Dasgupta, Laplante and Mamingi (1998)involve the following steps. First, is the choice of event(s) under study, which leads toa definition of the event window. Studies using modern capital market data define eventwindows as few days before the event, the event is defined as t = 0, and then few days after.Defining an event window as ten days before and after events is common practice. Second,is the selection of firms to study. Third, involves predicting the counterfactual return as ifthe event had not occurred, i.e., normal return. Fourth, is estimating the abnormal return,which is the difference between the actual and the predicted return. And, fifth is testingwhether the abnormal return is significantly different from zero.

In addition to estimating individual firm specific abnormal returns, the methodology al-

20

21

lows for estimating Average Abnormal Returns(AAR) for example across firms experiencingthe same event, Cumulative Abnormal Returns (CAR), which involves adding the abnormalreturns for each day within the event window or a subset thereof) and Cumulative AverageAbnormal Returns (CAAR), which involves averaging the CAR across firms.

In our case, we do not have daily data on stock prices. Rather, we adapt the event-studymethodology to our monthly returns. As described in Section 2, the most important eventin Indian railways was the takeover of the guaranteed companies. As part of their originalcontracts, the sale price was the average value of their stock price in the three years leadingto takeover. Using event-study, we test for abnormal returns for the individual companiesin the three years leading to their takeover. In particular, we define the event as the GOItakeover and the event window as the three year window before takeover. Here, the sampleonly includes companies that were taken over.

One common approach to estimating the normal return is using the market model insome defined estimation window, typically 120 to 210 days before the event. We definethe estimation window as the three year window (36 months) four years before takeover.For example, the Great Indian Peninsula Company was taken over in June 1900. Its eventwindow extends from July 1897 to June 1900, while the estimation window runs from July1893 to June 1896. We drop the year immediately before the three-year window because itcould be contaminated by discussions of takeover.15

In a standard market model, the individual return of a firm is regressed on a marketreturn in the estimation window. But, the choice of market return is unclear in our context.Although these guaranteed securities traded in London, they appear to be uncorrelatedwith a British domestic equity index. And, as seen in the last section, markets treated thesesecurities as bonds, not equity. To get around this problem, we use the Comparison PeriodMean adjusted model. Here, the abnormal return is defined as:

ARit = Rit − R̄i

where R̄i is the mean return of the security in the estimation window. Using the indi-vidual abnormal return, we construct the cumulative return for each firm as follows:

CAR(t1,t2) =t2∑

t=t1ARit

Here, we define t1 and t2 as the beginning and end dates of our event window. We alsopresent CAR results for windows 1 year, 6 months and 3 months leading to takeover. And,the cumulative average abnormal return for GOI takeovers as the average of the cumulativeabnormal returns across all firms.

15That said, our results are essentially the same if we use shorter or longer estimation windows.

22

CAAR = 1N

n∑i=1

CAR(t1, t2)

Figures 8a and 8b plot the abnormal returns for the eight guaranteed companies in theirthree-year window before takeover (i.e., the event window). We plot the railways in orderof their takeover from the East Indian first on December 31, 1879 to Madras Railway on 31,December 1907. No clear patterns jump out. Abnormal returns trend mildly positive for theEast Indian in the year leading to their takeover, but the effect size is economically small.In comparison, abnormal returns of the Eastern Bengal Railways trend mildly negativeimmediately before takeover. Companies like the South Indian and Oudh and Rohilkhandare flat in the year before their takeover.

Table 3 shows the formal tests of significance, which confirm the pictures. Cumulativeabnormal returns are insignificant for majority of the railways and event windows. EastIndian and Eastern Bengal are the two exceptions. Leading to the first GOI takeover in1879, we find evidence of positive cumulative abnormal returns for the East Indian in their

23

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three month window before take over. At this time, there was uncertainty whether theGOI would indeed take over a private British company. Interestingly, cumulative abnormalreturns are negative for the Eastern Bengal both in their 3 month window and 3 year windowbefore takeover. After the East Indian, the Eastern Bengal was next in line with their 25th

anniversary on June 30, 1884. And, it seems markets punished them for their impendingtakeover.

At the time of purchase, the GOI paid the shareholders the average share price in thethree year window leading to takeover. Some payments were made in the form of annuities,others were paid outright. While the set-up suggests shareholders could try to manipulatethe stock price in the years leading to takeover, we find no evidence of systematic positiveabnormal returns. Even if shareholders could figure out how to collude, it would seemgaming did not occur. On average we find no significant evidence of positive or negativeabnormal return, but the returns are very volatile in the years leading up to takeover.16

This probably reflects the general uncertainty surrounding GOI takeovers.

6 Conclusion

Using detailed annual data on Indian securities trading in London over the late 19th andearly 20th century, we find Indian securities offered similar dividends by security type andindustry ranging from 4 to 8 percent. Indian dividends match those of foreign and domesticequities trading in London (Grossman 2015). In anything, dividends of the much malignedguaranteed securities trail corporate bonds in other parts of the world and Indian governmentbonds.

We also use the monthly data on prices from the IMM to test for abnormal returns inthe three year window before takeover of the original eight guaranteed companies. We findno evidence of significant cumulative abnormal returns, although volatility appears to behigher in this event window.

References - Incomplete

1. Grossman, Richard. “Bloody Foreigners! Overseas Equity on the London Stock Ex-change, 1869-1928,” Economic History Review 68(2), May 2015, pp. 471-521.

2. Grossman, Richard. “New Indices of British Equity Prices, 1870-1913” Journal of16In a future version, we hope to formally test whether the abnormal returns were indeed more volatile

in this period.

25

Economic History 62 (1), March 2002, pp. 121-146.

26

Figure A1: Railway Map of India, 1909

27

Table 1: Guaranteed Indian Railway Companies, Ownership

As of December 31, 1869

ContractDate

Numberof

Owners

% ofShare-holders

% ofDeben-ture

Holders

% ofShare-holders

registeredin

England

East Indian 1849 17,013 83% 17% 81%Great Indian Peninsula 1849 13,059 87% 13% 85%Madras 1852 7,076 88% 12% 88%Bombay, Baroda and Central India 1855 6,470 85% 15% 83%Sind, Punjab and Delhi 1855 7,601 97% 3% 95%Eastern Bengal 1858 2,128 79% 21% 77%Great Southern of India 1858 1,146 90% 10% 90%Oudh and Rohilkhand 1862 1,180 94% 6% 91%Carnatic 1864 244 100% 0% 87%

Notes: Great Southern of India was merged with Carnatic in 1874. The new company was named SouthIndian Railways.

28

Table 2a: Capital Gains, Dividend Yields and Total Returns, RAILWAYS

CapitalGain

DividendYield

TotalReturn

CapitalGain(MC)

DividendYield(MC)

TotalReturn(MC)

1870 0.0739 0.14821871 -0.0064 -0.01431872 0.0287 0.00961873 -0.0087 0.00911874 0.0344 0.04321875 0.0012 -0.01281876 0.0488 0.03961877 0.0143 0.02591878 -0.0019 0.00711879 0.0064 0.00541880 0.0314 0.0420 0.0734 0.0346 0.0414 0.07601881 0.0455 0.0399 0.0854 0.0468 0.0387 0.08551882 0.0123 0.0405 0.0528 0.0243 0.0413 0.06571883 0.1311 0.0409 0.1720 0.0195 0.0416 0.06111884 0.0373 0.0415 0.0788 0.0067 0.0421 0.04891885 -0.0617 0.0418 -0.0199 -0.0100 0.0420 0.03201886 -0.0829 0.0411 -0.0417 0.0100 0.0409 0.05091887 0.1627 0.0401 0.2029 0.0376 0.0396 0.07721888 0.0684 0.0402 0.1086 0.0457 0.0398 0.08551889 0.0495 0.0370 0.0865 0.0798 0.0370 0.11681890 0.1427 0.0375 0.1802 0.0049 0.0350 0.03991891 0.0288 0.0373 0.0661 0.0214 0.0359 0.05731892 -0.0329 0.0400 0.0071 -0.0049 0.0376 0.03271893 -0.0082 0.0409 0.0327 -0.0046 0.0368 0.03211894 -0.0229 0.0398 0.0169 -0.0239 0.0374 0.01361895 0.1013 0.0375 0.1389 0.0791 0.0342 0.11331896 0.0596 0.0364 0.0960 0.0447 0.0326 0.07731897 0.0636 0.0361 0.0998 0.0255 0.0324 0.05791898 0.0227 0.0383 0.0610 -0.0280 0.0315 0.00351899 0.0153 0.0369 0.0522 0.0367 0.0326 0.06931900 -0.0486 0.0378 -0.0108 -0.0539 0.0348 -0.01911901 -0.0313 0.0405 0.0091 -0.0862 0.0395 -0.04661902 0.0036 0.0413 0.0449 -0.0188 0.0392 0.02041903 -0.0118 0.0410 0.0293 -0.0045 0.0387 0.03431904 -0.0324 0.0421 0.0096 -0.0331 0.0402 0.00711905 0.0236 0.0420 0.0657 0.0115 0.0407 0.05221906 0.0303 0.0405 0.0708 0.0200 0.0409 0.0609

29

Table 2a: Continued

CapitalGain

DividendYield

TotalReturn

CapitalGain(MC)

DividendYield(MC)

TotalReturn(MC)

1907 -0.0185 0.0419 0.0234 -0.0122 0.0412 0.02901908 -0.0266 0.0434 0.0168 -0.0431 0.0436 0.00041909 0.0194 0.0451 0.0645 -0.0139 0.0495 0.03561910 0.0027 0.0436 0.0463 -0.0061 0.0427 0.03661911 -0.0007 0.0438 0.0432 0.0022 0.0429 0.04521912 0.0062 0.0442 0.0504 0.0137 0.0426 0.05631913 0.0143 0.0448 0.0591 0.0186 0.0440 0.06261914 -0.0299 0.0468 0.0169 -0.0279 0.0469 0.01901915 -0.0065 0.0476 0.0411 -0.0115 0.0473 0.03581916 -0.0364 0.0496 0.0132 -0.0319 0.0482 0.01631917 -0.1548 0.0610 -0.0938 -0.1642 0.0616 -0.10261918 0.0067 0.0620 0.0687 0.0193 0.0614 0.08081919 0.0572 0.0607 0.1178 0.0900 0.0605 0.15041920 -0.0519 0.0646 0.0127 -0.0525 0.0665 0.01401921 -0.1717 0.0821 -0.0895 -0.1677 0.0838 -0.08391922 0.0379 0.0798 0.1177 0.0304 0.0781 0.10851923 0.1612 0.0663 0.2275 0.1766 0.0648 0.24141924 0.0395 0.0640 0.1035 0.0311 0.0635 0.09461925 0.0401 0.0635 0.1036 0.0522 0.0632 0.11531926 0.0773 0.0611 0.1385 0.0808 0.0625 0.14331927 0.0720 0.0583 0.1303 0.0929 0.0620 0.15491928 0.0317 0.0579 0.0895 0.0596 0.0609 0.12051929 0.0387 0.0567 0.0954 0.0456 0.0592 0.1048

Average 0.0166 0.0472 0.0638 0.0111 0.0481 0.0592

30

Table 2b: Capital Gains, Dividend Yields and Total ReturnsGuaranteed Securities

CapitalGain

DividendYield

TotalReturn

CapitalGain(MC)

DividendYield(MC)

TotalReturn(MC)

1870 0.0065 0.02091871 -0.0032 -0.01561872 0.0216 0.00751873 -0.0013 0.01241874 0.0282 0.04581875 0.0043 -0.01571876 0.0417 0.03651877 0.0069 0.02761878 -0.0074 0.00841879 -0.0028 0.00611880 0.0258 0.0420 0.0678 0.0353 0.0414 0.07671881 0.0369 0.0406 0.0774 0.0474 0.0386 0.08601882 0.0066 0.0401 0.0467 0.0264 0.0416 0.06801883 0.0009 0.0401 0.0411 0.0167 0.0418 0.05851884 0.0073 0.0401 0.0473 0.0041 0.0425 0.04661885 -0.0020 0.0418 0.0397 -0.0098 0.0423 0.03251886 0.0020 0.0418 0.0438 0.0131 0.0411 0.05421887 0.0192 0.0408 0.0600 0.0299 0.0396 0.06951888 0.0586 0.0397 0.0984 0.0378 0.0403 0.07811889 0.0629 0.0373 0.1003 0.0878 0.0377 0.12541890 0.0062 0.0373 0.0435 -0.0047 0.0346 0.02991891 0.0012 0.0357 0.0369 0.0222 0.0359 0.05811892 -0.0103 0.0371 0.0268 -0.0011 0.0378 0.03671893 0.0029 0.0368 0.0397 -0.0054 0.0362 0.03081894 0.0011 0.0370 0.0381 -0.0385 0.0380 -0.00061895 0.0515 0.0359 0.0874 0.0876 0.0340 0.12161896 0.0390 0.0346 0.0737 0.0475 0.0319 0.07941897 0.0286 0.0344 0.0631 0.0241 0.0315 0.05571898 0.0695 0.0353 0.1048 -0.0539 0.0288 -0.02501899 -0.0146 0.0355 0.0210 0.0417 0.0311 0.07281900 -0.0373 0.0364 -0.0009 -0.0580 0.0337 -0.02431901 -0.0362 0.0379 0.0017 -0.1206 0.0401 -0.08051902 -0.0010 0.0375 0.0365 -0.0679 0.0394 -0.02851903 -0.0016 0.0372 0.0356 -0.0094 0.0380 0.02861904 -0.0274 0.0375 0.0101 -0.0515 0.0402 -0.01131905 0.0003 0.0378 0.0381 -0.0223 0.0406 0.01831906 0.0133 0.0375 0.0508 0.0231 0.0424 0.0656

31

Table 2b: Continued

CapitalGain

DividendYield

TotalReturn

CapitalGain(MC)

DividendYield(MC)

TotalReturn(MC)

1907 -0.0217 0.0385 0.0169 -0.0196 0.0412 0.02161908 -0.0479 0.0403 -0.0076 -0.0956 0.0444 -0.05111909 -0.0110 0.0398 0.0289 -0.0308 0.0458 0.01501910 -0.0121 0.0399 0.0278 0.0091 0.0448 0.05391911 -0.0048 0.0407 0.0359 -0.0315 0.0461 0.01461912 0.0004 0.0402 0.0406 0.0047 0.0463 0.05101913 -0.0109 0.0411 0.0301 -0.0370 0.0482 0.01121914 -0.0462 0.0427 -0.0035 -0.0577 0.0505 -0.00721915 -0.0004 0.0426 0.0422 -0.0204 0.0528 0.03241916 -0.0334 0.0454 0.0120 -0.0208 0.0541 0.033319171918191919201921 -0.1456 0.0742 -0.0714 -0.2909 0.1198 -0.17111922 0.0863 0.0709 0.1572 0.0855 0.1130 0.19851923 0.1282 0.0594 0.1876 0.2835 0.0878 0.37131924 0.0107 0.0583 0.0689 0.3681 0.0906 0.45871925 0.0156 0.0582 0.0738 0.0717 0.0831 0.15481926 0.0379 0.0575 0.0954 0.1925 0.0815 0.27401927 0.0549 0.0542 0.1091 0.3579 0.0775 0.43541928 0.0093 0.0547 0.0640 0.2067 0.0685 0.27521929 0.0265 0.0541 0.0806 0.0300 0.0750 0.1050

Average 0.0041 0.0442 0.0483 0.0154 0.0429 0.0582

32

Table 2c: Capital Gains, Dividend Yields and Total ReturnsDebentures and Bonds

CapitalGain

DividendYield

TotalReturn

CapitalGain(MC)

DividendYield(MC)

TotalReturn(MC)

1870 0.0162 0.01151871 -0.0242 0.01521872 0.0203 0.02001873 0.0111 -0.00291874 0.0434 0.02471875 -0.0096 0.00451876 0.0286 0.05271877 0.0234 0.00691878 0.0048 -0.00831879 0.0145 -0.00461880 0.0371 0.0420 0.0791 0.0276 0.0412 0.06881881 0.0563 0.0389 0.0952 0.0406 0.0399 0.08051882 0.0202 0.0411 0.0613 0.0039 0.0395 0.04341883 0.0077 0.0418 0.0496 0.0015 0.0394 0.04101884 -0.0008 0.0433 0.0425 0.0114 0.0392 0.05071885 -0.0045 0.0424 0.0379 -0.0063 0.0393 0.03301886 0.0131 0.0405 0.0536 0.0036 0.0392 0.04281887 0.0232 0.0388 0.0620 0.0143 0.0389 0.05321888 0.0241 0.0397 0.0638 0.0786 0.0377 0.11631889 0.0591 0.0361 0.0952 0.0728 0.0351 0.10791890 0.0055 0.0357 0.0412 0.0094 0.0348 0.04421891 0.0128 0.0364 0.0491 0.0017 0.0344 0.03611892 -0.0064 0.0370 0.0306 -0.0099 0.0350 0.02511893 -0.0001 0.0362 0.0361 0.0053 0.0349 0.04021894 -0.0241 0.0382 0.0141 0.0039 0.0347 0.03861895 0.0904 0.0339 0.1243 0.0566 0.0330 0.08961896 0.0573 0.0322 0.0895 0.0282 0.0321 0.06031897 0.0272 0.0314 0.0586 0.0283 0.0318 0.06011898 -0.0557 0.0286 -0.0271 0.0209 0.0325 0.05341899 0.0382 0.0312 0.0693 -0.0172 0.0330 0.01571900 -0.0631 0.0338 -0.0293 -0.0466 0.0343 -0.01221901 -0.1207 0.0405 -0.0802 -0.0384 0.0359 -0.00241902 -0.0679 0.0394 -0.0285 0.0020 0.0361 0.03811903 -0.0098 0.0380 0.0282 -0.0048 0.0358 0.03101904 -0.0518 0.0402 -0.0117 -0.0242 0.0369 0.01271905 -0.0222 0.0408 0.0186 -0.0013 0.0373 0.03601906 0.0241 0.0419 0.0660 0.0121 0.0373 0.0494

33

Table 2c: Continued

CapitalGain

DividendYield

TotalReturn

CapitalGain(MC)

DividendYield(MC)

TotalReturn(MC)

1907 -0.0260 0.0415 0.0154 -0.0145 0.0386 0.02411908 -0.0797 0.0438 -0.0359 -0.0440 0.0409 -0.00311909 -0.0308 0.0458 0.0150 -0.0169 0.0399 0.02311910 0.0091 0.0448 0.0539 -0.0156 0.0399 0.02431911 -0.0315 0.0461 0.0146 0.0017 0.0406 0.04231912 0.0047 0.0463 0.0510 0.0036 0.0399 0.04351913 -0.0370 0.0482 0.0112 -0.0048 0.0411 0.03641914 -0.0577 0.0505 -0.0072 -0.0508 0.0429 -0.00781915 -0.0204 0.0528 0.0324 -0.0071 0.0425 0.03541916 -0.0208 0.0541 0.0333 -0.0305 0.0447 0.01431917 -0.1548 0.0610 -0.0938 -0.1883 0.0570 -0.13131918 0.0067 0.0620 0.0687 0.0161 0.0567 0.07281919 0.0572 0.0607 0.1178 0.0586 0.0551 0.11371920 -0.0519 0.0727 0.0208 -0.0893 0.0612 -0.02811921 -0.2909 0.1198 -0.1711 -0.1253 0.0718 -0.05351922 0.0855 0.1130 0.1985 0.0702 0.0674 0.13761923 0.2835 0.0878 0.3713 0.1301 0.0565 0.18661924 0.3681 0.0906 0.4587 0.0052 0.0551 0.06031925 0.0717 0.0831 0.1548 0.0290 0.0550 0.08401926 0.1925 0.0815 0.2740 0.0236 0.0564 0.08001927 0.3579 0.0775 0.4354 0.0533 0.0533 0.10651928 0.2067 0.0685 0.2752 0.0062 0.0539 0.06001929 0.0300 0.0750 0.1050 0.0289 0.0530 0.0819

Average 0.0178 0.0503 0.0681 0.0022 0.0446 0.0468

34

Table 2d: Capital Gains, Dividend Yields and Total ReturnsCommon Equity

CapitalGain

DividendYield

TotalReturn

CapitalGain(MC)

DividendYield(MC)

TotalReturn(MC)

1870 1.3744 2.48801871 0.0366 -0.05221872 0.1303 0.11581873 -0.1572 -0.20371874 0.0627 0.08781875 0.0248 0.03971876 0.1854 0.24191877187818791880188118821883 1.3438 1.64741884 0.1887 0.0410 0.2297 0.0620 0.0410 0.10301885 -0.2664 0.0400 -0.2264 -0.0238 0.0400 0.01621886 -0.4206 0.0407 -0.3799 -0.4810 0.0400 -0.44101887 0.5320 0.0400 0.5719 0.2205 0.0412 0.26171888 0.1184 0.0413 0.1597 0.0431 0.0402 0.08331889 0.0263 0.0369 0.0632 0.0341 0.0371 0.07121890 0.4008 0.0388 0.4396 0.0567 0.0383 0.09491891 0.0757 0.0406 0.1163 0.0522 0.0384 0.09061892 -0.0703 0.0450 -0.0253 -0.0167 0.0407 0.02401893 -0.0247 0.0481 0.0234 -0.0166 0.0428 0.02621894 -0.0507 0.0441 -0.0066 0.0023 0.0395 0.04171895 0.1664 0.0409 0.2073 0.0756 0.0372 0.11281896 0.0875 0.0395 0.1270 0.0583 0.0365 0.09491897 0.1106 0.0394 0.1500 0.0274 0.0374 0.06481898 -0.0208 0.0437 0.0228 0.0049 0.0401 0.04501899 0.0447 0.0397 0.0843 0.0886 0.0379 0.12651900 -0.0599 0.0402 -0.0197 -0.0474 0.0397 -0.00781901 -0.0113 0.0439 0.0327 -0.0370 0.0427 0.00571902 0.0162 0.0465 0.0627 0.0239 0.0435 0.06731903 -0.0237 0.0460 0.0223 0.0029 0.0438 0.04681904 -0.0359 0.0474 0.0115 -0.0217 0.0448 0.02311905 0.0518 0.0469 0.0987 0.0716 0.0453 0.11691906 0.0501 0.0441 0.0943 0.0255 0.0435 0.0690

35

Table 2d: Continued

CapitalGain

DividendYield

TotalReturn

CapitalGain(MC)

DividendYield(MC)

TotalReturn(MC)

1907 -0.0139 0.0455 0.0316 -0.0034 0.0443 0.04091908 0.0014 0.0468 0.0482 -0.0061 0.0462 0.04011909 0.0508 0.0506 0.1014 -0.0080 0.0600 0.05191910 0.0172 0.0476 0.0648 0.0015 0.0454 0.04691911 0.0060 0.0475 0.0534 0.0062 0.0452 0.05141912 0.0133 0.0484 0.0617 0.0252 0.0452 0.07041913 0.0449 0.0488 0.0937 0.0460 0.0464 0.09241914 -0.0113 0.0516 0.0403 -0.0073 0.0499 0.04271915 -0.0129 0.0536 0.0407 -0.0147 0.0518 0.03711916 -0.0409 0.0548 0.0139 -0.0342 0.0516 0.01751917 -0.1352 0.0657 -0.0696 -0.1387 0.0666 -0.07211918 0.0033 0.0666 0.0700 0.0228 0.0666 0.08941919 0.0672 0.0650 0.1322 0.1218 0.0659 0.18771920 -0.0243 0.0685 0.0442 -0.0178 0.0710 0.05321921 -0.1996 0.0905 -0.1091 -0.2039 0.0940 -0.10991922 -0.0273 0.0907 0.0634 -0.0177 0.0871 0.06951923 0.1996 0.0751 0.2748 0.2182 0.0720 0.29021924 0.0621 0.0697 0.1318 0.0271 0.0694 0.09651925 0.0702 0.0694 0.1396 0.0733 0.0694 0.14271926 0.1207 0.0646 0.1853 0.1170 0.0658 0.18291927 0.0798 0.0628 0.1426 0.0932 0.0678 0.16101928 0.0520 0.0615 0.1135 0.0826 0.0656 0.14821929 0.0551 0.0591 0.1143 0.0615 0.0631 0.1245

Average 0.0729 0.0517 0.1246 0.0369 0.0532 0.0901

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Table 3: Event Study - 3 Years Leading to GOI Takeover

CompanyName

TakeoverDate

CAR - 36MonthEvent

Window

CAR - 12MonthEvent

Window

CAR - 6MonthEvent

Window

CAR - 12MonthEvent

Window

East Indian 31-Dec-1879 0.17 0.44 0.35 2.52**Great Indian Peninsula 30-June-1900 -1.58 -0.30 -0.52 -0.90Madras 31-Dec-1907 -0.06 0.52 0.32 1.24Bombay, Baroda & Central India 31-Dec-1905 1.91 0.96 0.90 0.37Sind 31-Dec-1885 -0.41 -0.15 0.01 0.77Eastern Bengal 30-June-1884 -2.53** -0.50 -0.44 -2.35**South Indian 31-Dec-1890 -0.24 0.52 0.20 1.26Oudh and Rohilkhand 31-Dec-1888 0.68 1.02 1.65 0.37

CAAR -0.29 1.22 1.34 1.29

Notes: East Indian is excluded in the CAAR calculation because we entered their data from the publishedIMM, and constructed their dividiend yield. Since we used the divident yield as reported in the IMM after1879 for the other railways, we did not want to combine their data for the CAAR if the published dividendyield series is constructed differently from our construction.

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