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Private Contracting, Law and Finance

Journal: Review of Financial Studies

Date: 20191101

Author: Acheson, Graeme G.; Campbell, Gareth; Turner, John D.

Abstract:
In the late nineteenth century Britain had almost no mandatory shareholder protections, but had very developed financial markets. We argue that private contracting between shareholders and corporations meant that the absence of statutory protections was immaterial. Using approximately 500 articles of association from before 1900, we code the protections offered to shareholders in these private contracts. We find that firms voluntarily offered shareholders many of the protections that were subsequently included in statutory corporate law. We also find that companies offering better protection to shareholders had less concentrated ownership.

Link: Google Scholar

Background and Context

Research Question

How did Victorian Britain have thriving financial markets despite weak statutory shareholder protection laws in the pre-1900 era?

Methodology

Analysis of 483 articles of association from companies established between 1862-1899, examining the voluntary shareholder protections they offered.

Data Sources

Company records from National Archives at Kew, National Archives of Scotland, and historical stock market data from Course of Exchange and Investor's Monthly Manual.

Evolution of Voluntary Shareholder Protections 1860s-1890s

Companies voluntarily adopted increasingly more shareholder protections over time
By the 1890s, firms averaged 4.13 out of 5 modern mandatory provisions
Shows evolution toward better governance without statutory requirements

Distribution of Total Shareholder Protection Provisions

Despite no legal requirements, all companies adopted at least 3 protections
Most companies (68%) adopted between 7-10 provisions
Shows widespread voluntary adoption of shareholder protections

Decline in Archaic Provisions Over Time

Archaic provisions became much less common over time
Shows companies learned which protections were ineffective
Demonstrates natural evolution of corporate governance practices

Relationship Between Protections and Ownership Concentration

Companies with more protections had less concentrated ownership
Better protected companies attracted more small shareholders
Demonstrates economic benefits of voluntary protections

Adoption of Modern Governance Standards

Companies increasingly adopted provisions still used in modern governance
By 1890s, average company had 6.3 of 9 modern provisions
Shows Victorian practices influenced modern corporate governance

Contribution and Implications

Private contracting can provide effective shareholder protection without mandatory regulation
Companies voluntarily evolved toward better governance practices through market competition
Modern corporate law largely codified existing business practices rather than creating new standards

Data Sources

Evolution Chart: Based on Table 7 "Modern Standards" data
Distribution Chart: Based on Figure 1 data
Archaic Provisions Chart: Based on Table 6 data comparing 1860s and 1890s
Ownership Chart: Based on Table 9 regression results
Modern Standards Chart: Based on Table 7 "Model Articles 2016" data