Squeezing the Bears: Cornering Risk and Limits on Arbitrage during the ‘British Bicycle Mania’, 1896-1898

This article examines the extent to which Victorian investors were short‐sale constrained. While previous research suggests that there were relatively few limits on arbitrage, this article argues that short‐sales of stocks outside the Official List were indirectly constrained by the risk of being cornered. Evidence for this hypothesis comes from three corners in cycle company shares which occurred in 1896–7, two of which resulted in substantial losses for short‐sellers. Legal efforts to retrieve funds lost in a corner were unsuccessful, and the court proceedings reveal a widespread contempt for short‐sellers, or ‘bears’, among the general public. Consistent with the hypothesis that these episodes affected the market, this study's findings show that cycle companies for which cornering risk was greater experienced disproportionately lower returns during a subsequent crash in the market for cycle shares. This evidence suggests that, under certain circumstances, short‐selling shares in Britain prior to 1900 could have been much riskier than previously thought.