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The South Seas Bubble by soft skils

The South Seas Bubble by soft skils● In the early Eighteenth Century, the South Seas Company was granted exclusive trading rights in the South Seas (South American colonies) in return for helping to finance Government borrowing.
● To help grow their operations, they looked for investors and issued shares.
● Things seemed to be going well – more and more investors put money in.
● There were expensive London offices – it all looked very successful.
● Management lied about how good it was – with no information available other than what management told them, investors did not know the truth.
● In 1718, Britain and Spain went to war … and the ability to trade in the South Seas was now zero.
● But investors did not know this and kept buying shares …..
● …..whilst management secretly sold their own shares.
● Once the truth got out, there was a crash – the "South Seas Bubble" had burst. What can we learn from this? ● Investors need to be able to trust managers / directors.
● Directors have all the information.
● Investors need to be provided with complete, accurate information.
● But if the directors provide this information, they might lie!
● Directors may act to make themselves wealthy, not the investors.
● If management are selling shares, investors should be told – and be able to ask why!
At the time, the UK Government reaction to this was the first "corporate governance" …
THEY BANNED LIMITED COMPANIES. ISSUING SHARES WAS ILLEGAL!!!
Eventually, this situation had to change. In the 19th Century, the growth of railways that needed investment, and the existence of limited companies in the USA, meant that the UK had little choice but to follow, and allow limited companies
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