Contractual Innovation and Corporate Finance in Seventeenth-Century Toulouse

Abstract

In Toulouse, after a destructive flood in 1641, a coordination failure made traditional capital calls ineffective, preventing the recapitalization of the Castel Mills. Drawing on agreements registered with the Parlement of Toulouse, we show how shareholders crafted a solution combining a temporary governance regime with three classes of equity claims featuring distinct risk–return profiles and intertemporal payoffs. This menu of claims accommodated heterogeneous investors with different risk tolerances, liquidity constraints, and expectations about the repairs’ success. Corporate innovation can thus arise from profit-seeking investors relying on explicit contracts, addressing agency problems through the reallocation of control rights and access to information while explicitly seeking to preserve the firm’s continuity. The case challenges teleological narratives of the joint-stock company’s origins and speaks to debates on capitalism’s development, convergent evolution in business organizations, institutions and economic growth, the flexibility of “corporations by contract” in a civil-law setting, and cooperation among individuals.