1. Corporate Governance and Listing Requirements: London at the Turn of the Twentieth Century Fabio Braggion CentER & Tilburg University

2. Shleifer and Vishny (1997) ”Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment” How did people deal with this issue a hundred years ago?

3. Agency Problems (Jensen, 1986)  Cash left in the hands of insiders (e.g. management team) may be used for personal use, or diverted into unprofitable projects  Temptation to waste cash (e.g. on takeovers) is likely to be greatest for mature companies

4. Plan of the Talk What did the Rule say?  Listing Requirements What did company (and investors) do?  Dividends  Directors’ Borrowing Powers  Size of the Boards  Independent Directors (Absence of…)  Company Promoters and Titled Directors  Trust (Franks, Mayer and Rossi, 2007)

5. Conditions for an Application for Official Quotation On the Prospectus: Shall have been publicly advertised; Agrees substantially with the Act of Parliament or Articles of Association; Provides for the issue of not less than one-half of the authorised capital and for the payment of 10% upon the amount subscribed. If offering Debentures or Debenture Stock, states fully the terms of redemption.

6. Article of Associations That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares; That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

7. Article of Associations That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares; That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares; That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

8. Article of Associations That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares; That Directors must hold a share qualification; That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

9. Article of Associations That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares; That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

10. Article of Associations That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares; That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common Seal of the Company; That fully paid Shares shall be free from all lien; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

11. Article of Associations That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares; That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before execution, and that such Director shall not vote in respect thereof; That the interest of a Director in any contract shall be disclosed before execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

12. Article of Associations That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares; That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange That a printed copy of the report, accompanied by the Balance Sheet and Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

13. Trust Deeds The Trust Deed must provide that should the Company go into voluntary liquidation for the purpose of amalgamation or reconstruction the security shall not be repayable at a lower price

20. What did company do? Dividend Payout Ratio

21. Institutional Details:  Very Low Taxation on Dividends (≈5%)  Share repurchases forbidden ( Trevor v. Whitworth (1887))

22. Agency and Dividends  Dividends are a way to return cash to shareholders (i.e. cash is not wasted by managers but goes back to shareholders)  If Dividends are a way to resolve an agency problem, dividend payments should be higher in companies where agency problems are more severe  Market may not like dividend cuts for mature, cash-rich companies because managers may waste the retained cash

23. The Data 469 British firms  134 listed officially on the LSE  335 not listed on LSE Observe these companies every year between 1895-1905 Information on:  Earnings  Dividends  Other firm characteristics  Share Prices  Date of Dividend Announcements

25. Some Results: Dividends Increases of Commencements: 1.4% excess of returns in the week of the announcement (1.34% in recent times) Dividends Cuts or Omissions: -2% excess of returns in the week of the announcement (-3.71% in recent times) Few differences in impact of dividend cuts/increases based on proxy of companies’ maturity: Few differences in impact of dividend cuts/increases based on proxy of companies’ maturity:  Tobin’s Q, Age, Earned to Total Equity

26. Some Results: Management were far more likely to change a firm's dividend, and in particular to cut the dividend Of the dividend announcements we study:  we find 27.5% that were decreases or omissions (compared to 2.5%)  28.5% that were increases or commencements (compared to 36.9%)  44.1% that were no change (compared to 60.5%).

27. Profitability is the main determinant of dividend payments Profitability is the main determinant of dividend payments Again, measures related to companies’ maturity are at beast a weak determinant of dividend payouts Again, measures related to companies’ maturity are at beast a weak determinant of dividend payouts one s.d. increase in age (17 years) leads to 5% point increase in the ordinary payout ratio one s.d. increase in age (17 years) leads to 5% point increase in the ordinary payout ratio Who paid the most?

28. What about firms not listed on LSE? 335 firms 335 firms These were either traded unofficially in London, or listed officially in provincial markets (e.g. Glasgow, Manchester) These were either traded unofficially in London, or listed officially in provincial markets (e.g. Glasgow, Manchester) Generally small shareholder based/Family FirmsGenerally small shareholder based/Family Firms Agency problems between managers and shareholders should be less severeAgency problems between managers and shareholders should be less severe

29. What about firms not listed on LSE? If Agency Theories are true:If Agency Theories are true: -Managers of listed companies should more keen to disburse excess of cash in the form of dividend -Especially managers of older, more mature companies… Agency problems between managers and shareholders are more severe in listed companies

32. Payout ratio is similar to listed firms Payout ratio is similar to listed firms No relevant difference in the payouts determinants for listed and unlisted companies No relevant difference in the payouts determinants for listed and unlisted companies Results Unlisted:

33. We don’t find strong evidence of Dividends resolving Agency problems Why?  Managers did not care. Investors’ protection was too low… (outcome model of dividends)  Absence of Taxes (Allen et al. 2000). Tax differences among investors are a tool to attract investors with better monitoring capabilities

34. Other ways to resolve it… Directors Borrowing Powers  More mature companies had stricter rules on Directors Borrowing Powers Borrowing Powers were reduced of 20% in mature companies Banks Monitoring  More mature companies were more likely to have business relationships with more than one bank (results a bit controversial, but it could stand for additional external monitoring)

35. Companies Promoters Acted as underwriters Borrowed money to buy stakes in private companies “Reconstruct” Private companies Made them public Profits made on capital gains

36. Companies Promoters They worked out the bureaucracy for newly quoted companies They marketed the securities of newly quoted companies It was practice to appoint title directors (Lords, Sirs, MPs) on the board of companies

42. Sounds like a “typical” Social Networks Story: Useful tools when markets do not process information effectively  Social Interactions in the network are a cheap opportunity to gather information Solve problems of contract enforceability  Peer pressure may induce borrowers to pay back their loans However, there are risk of collusion and inefficiency

43. Some empirical evidence

48. On Boards… Boards were relatively smaller when compared to present days:  In 1900 about 5 members  In 2000 (UK) between 8.5 and 9 members  In 2000 (US) about 12 members Boards were all composed by insiders Companies could set up the necessary conditions to be directors

49. Other Questions Dual Class of Shares Preference Shares carrying voting rights… Managers Compensation