Arbitrage and Simple Financial Market Efficiency during the South Sea Bubble: A Comparative Study of the Royal African and South Sea Companies Subscription Share Issues

Subscription shares of the early 18th century were early examples of what today would be called innovated securities. Either by intent or happenstance, they served to overcome imperfections in the capital markets of the day. Not all such securities were, however, alike. The prominent examples of the subscription shares of the South Sea Company and the Royal African Company in 1720 were quiet different in their design and the corporate financial policies they were intended to aid. The historical literature emphasises the importance of irrational pricing behaviour during the South Sea Bubble, yet it is remarkable that in the financial markets of 1720 the relative values of subscription shares are easily understandable using standard financial theory.