What Were The Railway Investors Expecting and How Did They Impact the Railway Mania?

Many believed it would be impossible to persuade people to switch from horse drawn carriages to unfamiliar railways. The Liverpool-Manchester railway defied all expectations and was a success. Rail passengers outnumbered coach passengers, which made the railway extremely profitable and provided investors with high returns. This served as the early evidence to investors that railroads would be profitable. 

 

Investors thought they were on track for dividends of 10%. Since railways were privately owned, it was possible to charge high fares and make large profits. This was seen to be true in the beginning, and investors' expectations of high returns were justified. This created high demand for railway shares, leading to increased share prices. 

 

 

Investors remained enthusiastic in the early 1840s, as share prices were rising, but as time went by, they realised they were not receiving the returns they expected. 

 

 

The Economist had argued that “whatever affected trade inevitably affected the traffic on the railways.” The graph below indicates that there was a positive relationship between railway dividends and economic growth meaning that investor expectations were affected by changes in the economy. The economy was doing well in the early 1840s, contributing to the boom in the railways, but economic downturn in the late 1840s, changed investors' expectations and contributed to the fall in share prices, and reduction in dividends.  

 

 

Investors were successful in incorporating projections of short-term dividend adjustments into their valuations but were unable to foresee longer-term changes. Prices started to decline as investors eventually changed their expectations and started predicting lower returns. This suggests that investor expectations' narrow focus may have been a significant factor in the emergence of the Mania.