Listing Policy and Development of the Tokyo Stock Exchange in the Pre-War Period

Recent studies have established that the Japanese stock market had a substantial size in the pre-war period, and played an important role in financing economic development. The pre-war stock market in Japan, however, did not achieve its size and status quickly. Indeed, the market capitalization stayed relatively small during the early years of the stock market development in Japan. This paper studies the pre-war development of the Tokyo Stock Exchange, which eventually grew to be one of the two largest stock exchanges in the pre-war Japan, and examines why the development was rather stagnant since its establishment in 1878 to the 1910s and what led to its take-off in the late 1910s. The paper argues that the TSE stayed small because low liquidity discouraged new companies from listing their stocks. The lack of growth in new listed stocks meant liquidity continued to be low until 1918, when the TSE slightly changed its listing policy to start listing companies without waiting for their listing applications. The paper provides empirical evidence from listing behavior of cotton spinning firms that shows the size of the market indeed mattered for their listing decision before 1918