Abstract: Protecting Outside Investors in a Laissez-faire Legal Environment: Corporate Governance in Victorian Britain
Although the British capital market experienced a great expansion in the nineteenth century, companies in Victorian Britain operated in a laissez-faire legal environment from the perspective of outside investors. This paper seeks to identify the alternative mechanisms which were used to protect outside shareholders by examining the corporate governance of over 800 publicly-traded companies. We assess the effectiveness of these mechanisms by estimating their impact on firm performance. Our evidence suggests that dividends acted as a substitute for legal protection. Our findings also suggest that board independence may also have played a role in protecting outside investors. Notably, company voting rules and shareholder monitoring does not appear to have played a role in protecting shareholders. The findings of this article, as well as having implications for contemporary law and finance debates, may have some bearing on the long-running debate on the role of the capital markets in the alleged failure of the Victorian economy.