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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

Key Findings

Voluntary Protection

Despite weak mandatory shareholder protections in Victorian Britain (1862-1899), companies voluntarily offered substantial protections through their articles of association, with most firms adopting 9 provisions on average

Evolution of Standards

Companies increasingly adopted modern governance practices over time while dropping archaic provisions, showing an evolutionary improvement in shareholder protections

Ownership Structure

Companies offering better shareholder protections had more dispersed ownership, suggesting protections helped attract smaller investors

Adoption of Shareholder Protections

  • Most companies adopted between 7-10 shareholder protection provisions
  • Only 2% of companies adopted minimal protections (3-4 provisions)
  • Very few companies (2%) adopted extensive protections (13+ provisions)

Evolution of Protection Standards Over Time

  • Modern protection standards increased significantly from 5.30 to 6.30 provisions
  • Archaic provisions declined sharply from 0.90 to 0.17 provisions
  • Shows clear evolution toward better governance practices

Relationship Between Protections and Ownership

  • Companies with higher protections had 20% fewer large blockholders
  • Suggests better protections attracted smaller investors
  • Consistent with wider dispersion of ownership

Contribution and Implications

  • Demonstrates that private contracting through articles of association can effectively protect shareholders even without strong mandatory laws
  • Shows how governance standards naturally evolved toward better practices through market forces rather than regulation
  • Suggests modern developing markets might benefit from allowing firms flexibility in setting governance standards

Data Sources

  • Distribution of protections chart based on Figure 1 showing percentage of companies adopting different numbers of provisions
  • Evolution chart based on Table 7 showing adoption of modern vs archaic provisions over decades
  • Ownership concentration chart based on regression results from Tables 9-11 showing relationship between protections and blockholder presence