Shareholder rights and share capital: the effect of the 1901 Russian Corporation Reform, 1890–1905

Abstract

During the nineteenth and early twentieth centuries, western European countries introduced general incorporation and additional flexible enterprise forms, but the Russian Empire left its concession system of incorporation in place. The Empire's only major corporation reform, the 1901 law, strengthened minority shareholder rights and removed bankers from boards of directors for certain corporations. The reform offers a rare opportunity to examine the financial effects of improving corporations' principal-agent relationships through regulation, because the reform did not affect all corporations equally. Corporations affected by the reform had smaller total share capital, fewer shares, and higher par values for shares as observed in 1905. The new regulations may have increased the cost of having shareholders and hence disciplined corporations' founders to be more conservative in raising capital by issuing stock. Removing bankers from boards of directors may have removed an important source of firms' founding capital, though corporations could easily evade this provision. The results also show that, although the commercial code treated all corporations equally, there were two major groups of Russian corporations that behaved differently, and, despite the fact that corporate charters could grant individual exceptions to the commercial code, a revision in the commercial code changed corporations' behaviour.

Financing industrial corporations in a developing economy: panel evidence from Imperial Russia

“…Such information asymmetries were likely only partially mitigated by the financial press and the monitoring (and underwriting) of financial intermediaries. Moreover, these frictions were compounded by the general lack of de facto legal protection for small and medium investors, even after a 1901 reform explicitly addressed this issue (Gregg 2017). 14…”

“… 14 Corporations founded after 1901 tended to issue larger shares to a tighter group of shareholders (Gregg 2017). Year of founding effects and controls for corporation ‘type’ partially take this reform into account.…”