Market and Regional Segmentation and Risk Premia in the First Era of Financial Globalization

Abstract

We study market segmentation effects using data on U.S. railroads that list their bonds in New York and London between 1873 and 1913. This sample provides a unique setting for such analysis because of the precision offered by bond yields in cost of capital estimation, the geography-specific nature of railroad assets, and ongoing substantial technological change. We document a significant reduction in market segmentation over time. While New York bond yields exceeded those in London in the 1870s, this premium disappeared by the early 1900s. However, the segmentation premium persisted in the more remote regions of the United States.

Keywords: Cross-listing; Economic geography; Market integration; Stock exchanges

JEL Classification: F36, G15, G30, O16