"How pre-WWI Paris-listed firms solve agency issues: the statutory rule of profit allocation"

Agency issues (the conflicts that arise due to the divergence of stakeholders’ interests within firms) remain a critical challenge faced by companies. This study examines an original governance mechanism, widespread within the firms listed on Paris stock markets at the turn of the 20th century: a statutory rule of profit allocation. This rule fixes the part of profits to be allocated to a pre-determined set of agents in corporate statutes, including to shareholders. Focusing on the part allocated to shareholders, we calculate the portion of corporate profits promised, as dividends, to shareholders (the expected dividend payout ratio – EDPR). The rule could constitute an original solution to a classic agency conflict: the controllers-versus-minority-shareholders one. Indeed, a higher EDPR promised to shareholders may (i) make deviation of firm cash by controllers more difficult, (ii) align controllers’ with minority shareholders’ interests, and (iii) provide a positive signal over the firm commitment to pay. In the first part, this study shows that the rule does help decreasing agency issues between controlling and minority shareholders. Firms with more severe agency conflicts promise a greater share of their profits to shareholders (said differently, firms that are larger, located further, that have less debt and several types of shares have a greater EDPR). In the second part, the study provides evidence of the efficiency of the rule. Not only is the rule aimed at decreasing agency issues between controlling and minority shareholders, but it works in doing so. First, firms with more severe agency issues do not deviate too much from it (despite the specific deviations sometimes allowed) and distribute actual dividends close to the promised ones. Second, we show that this rule manages to reassure potential future investors, and allows firms to rely more on equity funding.