Railroad Receiverships and Modern Bankruptcy Theory

Some of the most important - and most interesting - recent work in the area of corporate and sovereign bankruptcy is rooted in the late 1800s and early 1900s, the golden age of the railroad receivership. Yet we know very little about railroad or equity receiverships beyond how they worked in theory. This paper remedies the existing gap in the literature by looking at a sample comprised of the largest railroads in the United States at the turn of the twentieth century, approximately half of which went through a receivership between 1890 and this country's entry into World War I. By examining the fate of these two groups of railroads after the World War, I am able to shed some light on the long-term effectiveness of receiverships. The results are striking. The data shows that having undergone a receivership before World War I made a railroad more than two and a half times (i.e., 150%) more likely to undergo another receivership or bankruptcy after the War. The average railroad that reorganized under a receivership subsequently failed at a rate more than twice as high as railroads that had never gone through a receivership and almost three times as high as modern chapter 11 debtors. And the data shows that Morgan's involvement with a road had little effect on the road's ability to avoid financial distress.