Dividend Policies in an Unregulated Market : The London Stock Exchange 1895 - 1905 ∗

In perfect and complete financial markets Miller and Modigliani (1961) show that a firm’s value is unaffected by its dividend policy. Taxation, asymmetric information, incomplete contracts, institutional constraints, and transaction costs cause their theorem to fail in practice. We examine the effects of dividend policies on 323 securities that were listed on the London Stock Exchange between 1895 and 1905. The London Stock Exchange operated in an environment of very low taxation and an absence of institutional constraints. This allows us to investigate the worthiness of signalling and agency theories of dividend policy in a setting where many of the imperfections of modern markets do not exist. ∗The authors would like to thank Franklin Allen, Elena Carletti, Toby Daglish, Vasso Ioannidou, Julij Jegorov, Steven Ongena, Graham Partington, Tony van Zijl, Bas Werker, and seminar participants at the University of Auckland, Center for Financial Studies University of Frankfurt, European Central Bank, Massey University, University of New SouthWales, University of Sydney, and the First Workshop in Financial History, Utrecht May 12, 2007 for comments and suggestions. Moore acknowledges support from a Victoria University of Wellington University Research Fund in the writing of this paper. Beryl Bao, Sebastiaan Dekker, and Mark van der Biezen provided excellent research assistance. †Moore is from Victoria University of Wellington, Braggion is from the University of Tilburg. E-mail: [email protected] (Moore), [email protected] (Braggion).