Working Paper: CEPR ID: DP3822
Authors: Julian R. Franks; Colin Mayer; Stefano Rossi
Abstract: In the first half of the twentieth century, the UK capital markets were marked by an absence of investor protection; by the end of the century, there was more extensive protection there than virtually anywhere else in the world. The UK therefore provides an exceptional laboratory for evaluating how regulation affects the development of securities markets and corporations. We investigate this question by tracing the ownership and board composition of firms incorporated in around 1900 over the subsequent 100 years, and comparing the pattern of ownership and control with a sample incorporated around 1960. We find that at the beginning of the century there were active securities markets, firms were able to raise substantial outside equity finance, and there was rapid dispersion of ownership even in the absence of investor protection. The introduction of investor protection in the second half of the century was not associated with greater dispersion of ownership but with more trading in share blocks. We offer an explanation as to how UK capital markets could flourish in the absence of investor protection.
Keywords: control; investor protection; ownership; stock markets
JEL Codes: G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of formal investor protections (G38) | substantial ownership dispersion (G34) |
| informal relationships of trust (L14) | substantial ownership dispersion (G34) |
| introduction of investor protection (G18) | heightened trading in share blocks (G34) |
| takeovers (G34) | dilution of family ownership (G32) |
| geographical expansion of firms through acquisitions (F23) | dilution of family ownership (G32) |
| mutation of ownership (H13) | increase in turnover of shareholders (G34) |