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Government Loan Guarantees and the Failure of the Canadian Northern Railway

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  • Frank Lewis
  • Mary MacKinnon

Abstract

The failure of the Canadian Northern Railway is analysed with a model of optimal capital structure drawn from Finance theory. Ex ante bankruptcy probabilities, which are computed on the basis of different assumptions about investors' expectations, range from 40% to 90%; and our best estimate is about 75%. These high probabilities, we argue, were a consequence of loan guarantees provided to the Canadian Northern by the Federal and provincial governments. These guarantees induced the promoters, MacKenzie and Mann, to undertake an ex ante unprofitable project and to finance that project almost exclusively with debt.

Suggested Citation

  • Frank Lewis & Mary MacKinnon, 1986. "Government Loan Guarantees and the Failure of the Canadian Northern Railway," Working Paper 645, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:645
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    Cited by:

    1. Gillian C. Hamilton & Ian Keay & Frank D. Lewis, 2017. "Contributions to Canadian economic history: The last 30 years," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1632-1657, December.
    2. Olivier Debande, 1997. "Le rôle du secteur privé dans le financement des infrastructures : une mise en perspective historique," Revue Économique, Programme National Persée, vol. 48(2), pages 197-230.

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