Government Loan Guarantees and the Failure of the Canadian Northern Railway

Frank Lewis and Mary MacKinnon

Working Paper from Economics Department, Queen's University

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.

Pages: 40 pages
Date: 1986
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Journal Article: Government Loan Guarantees and the Failure of the Canadian Northern Railway (1987)
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