Determinants of Railroad Capital Structure, 1830-1885

Daniel A. Schiffman

Bar-Ilan University

Abstract. U.S. Railroads suffered repeated financial crises in the 19th and 20th Centuries. These crises were caused by a combination of high debt levels and strongly procyclical revenues and profits.  Given the inherent instability of profits, why did railroads depend primarily on debt to finance their initial growth?  I find that, over 1830-1885, railroads faced significant agency and control problems, which were partially mitigated by the use of debt. Around 1885, new developments reinforced the initial tendency towards debt-heavy capital structures.