Minsky’s financial instability hypothesis, information asymmetry and accounting information: the UK financial crises of 1866 and 1987

Abstract

This article examines two major events in the economic and financial history of the UK in terms of the financial instability hypothesis (FIH), a theory of boom, bust and financial crises. The first involves the rise of limited liability in the 1860s and its subsequent disgrace. The second involves the economic boom of the 1980s, the stock market crash, and the subsequent recession. It is shown that, while the FIH is underpinned by a microeconomic model of the financial management of a business, it does not recognize the differences between the company’s interests and those of its owners, the conflicts caused, the likelihood of informational asymmetry and its implications for accounting information. The article shows how in these two episodes the owners of companies may exploit their limited liability and informational asymmetry. Because the FIH does not consider these factors, it is incomplete both as an explanation and as a predictor of financial crises.