Substitutes for legal protection: corporate governance and dividends in Victorian Britain1

Abstract

Companies in Victorian Britain operated in a laissez-faire legal environment from the perspective of outside investors, implying that such investors were not protected by the legal system.This article seeks to identify the alternative mechanisms that outside shareholders used to protect themselves by examining the dividend policy and governance of over 800 publicly traded companies at the beginning of the 1880s. We assess the importance of these mechanisms by estimating their impact on Tobin's Q. Our evidence suggests that dividends and well-structured and incentivized boards of directors may have played a role in protecting the interests of outside investors.T he British capital market underwent a great transformation in the nineteenth century in terms of the number and value of equity securities. 2 The liberalization of incorporation law and the establishment of regional stock exchanges removed supply constraints, while the increasing wealth and financial sophistication of the middle classes simultaneously increased the demand for publicly traded equity.The rapid growth in the number of companies issuing such equity raises the question as to how outside investors were assured that they would receive a return on their investment as well as their initial capital back. 3 Recent academic studies have suggested that the legal system plays an important role in determining the level of protection enjoyed by outside shareholders. 4 However, in the Victorian era, British company law and common-law principles were laissez-faire in this regard. 5

Law and Finance c. 1900

“…According to Campbell and Turner (2007), in 1883, 43% of the 716 companies listed on the London Stock Exchange for which they have data incorporated graduated voting scales and 23% maximum vote provisions in their bylaws. In the aggregate, 52% of corporations had caps on voting, graduated voting schemes, or a combination thereof.…”

“…It would be safer to say that ownership took, as in French civil law countries, two distinct forms: family or tightly held, and widely held. Campbell and Turner (2007) observe that -many of the publicly-traded companies in late Victorian Britain had diffused ownership. In particular, banks and railways.…‖ Banks tended to exhibit less concentrated ownership because some limited the proportion of equity that could be held by a single shareholder.…”

Can Disclosure Quality Explain Dividend Payouts?

“…First, we contribute to the literature that examines the impact of corporate governance on dividend payouts. While previous studies have used corporate governance indexes (Jiraporn & Ning, 2006;Chae et al, 2009;Sawicki, 2009;Adjaoud & Ben-Amar, 2010;Jiraporn et al, 2011;Bae et al, 2012) or several corporate governance related variables, such as board composition, CEO duality, and board size (Campbell and Turner, 2011;Chen et al, 2011;Chang and Dutta, 2012;Abor & Fiador, 2013) to explain the dividend policy, this study focuses on another aspect of corporate governance issue, disclosure quality, that has received less attention. Second, this study argues that using a corporate governance index suffers from a drawback because it is composed of several aspects of governance (Jiraporn et al, 2011).…”

Corporate Ownership, Control, and Firm Performance in Victorian Britain

“…However, the perception of boards of directors in the Victorian era is somewhat mixed. A contemporary judge believed that independent directors assured minority shareholders (Kennedy, 1987, p. 126), whereas a contemporary legal writer saw independent directors as incompetent or pre-occupied (Chadwyck-Healey, 1884) or ornamental rather than playing any useful economic function (Campbell and Turner, 2011;Chandler, 1990, p. 242).…”

“…For example, Foreman-Peck and Hannah (2013) find that, for the largest UK companies in 1911, diffuse ownership did not operate against shareholders' interests, suggesting that agency problems were somehow reduced. 4 Examining corporate ownership structure in the Victorian era is enlightening for contemporary economists because the period under examination was one where the investor protection environment was very weak by modern standards (Campbell and Turner, 2011).…”