John D. Turner

Financial Sector Reforms in Developing Countries: The Indian Experience

This study is based on the premise that the success/failure of financial sector reforms depends heavily on country specific factors and makes an attempt to examine these factors in the Indian context. The financial sector reforms analysed in this paper include the deregulation of interest rates, increasing competition and foreign ownership, and the introduction of financial supervision. We argue that an economic rationale for a gradualist approach to financial reform is that it is stability enhancing. Furthermore, we suggest that Indias complex political economy has resulted in a gradual approach to reform, and this approach has been successful along the dimension of banking stability. Copyright Blackwell Publishers Ltd 2002.

Rule Britannia!: British Stock Market Returns, 1825-1870

This article presents a new series of monthly equity returns for the British stock market for the period 1825-1870. In addition to calculating capital appreciation and dividend yields, the article also estimates the effect of survivorship bias on returns. Three notable findings emerge from this study. First, stock market returns in the 1825-1870 period are broadly similar for Britain and the United States, although the British market is less risky. Second, real returns in the 1825-1870 period are higher than in subsequent epochs of British history. Third, unlike the modern era, dividends are the most important component of returns.

Substitutes for Legal Protection: Corporate Governance and Dividends in Victorian Britain

Companies in Victorian Britain operated in a laissez-faire legal environment from the perspective of outside investors, implying that such investors were not protected by the legal system. This article seeks to identify the alternative mechanisms that outside shareholders used to protect themselves by examining the dividend policy and governance of over 800 publicly traded companies at the beginning of the 1880s. We assess the importance of these mechanisms by estimating their impact on Tobins Q. Our evidence suggests that dividends and well-structured and incentivized boards of directors may have played a role in protecting the interests of outside investors.

The Impact of Limited Liability on Ownership and Control: Irish Banking, 1877-1914

Limited liability is regarded as the sine qua non of the modern company, enabling firms to raise capital from a broad spectrum of investors who have well-diversified portfolios. This article uses the ownership records of an Irish bank, which converted to limited liability in 1883, to explore the impact of introducing limited liability upon ownership and control. We find that ownership becomes more dispersed amongst individuals from a broader social and geographical spectrum. However, there appears to be little impact on portfolio diversification. Furthermore, although limited liability appears to contribute to the rise of the professional director, the evidence suggests that managerial incentives may have been weakened.

Does the law and finance hypothesis pass the test of history

For the body of work known as the law and finance literature, the development of financial markets and the concentration of ownership across countries is to a large extent the consequence of the legal system nations created or inherited decades or hundreds of years ago. Despite the seemingly historical nature of this explanation, most of the body of work supporting the law and finance hypothesis has been ahistorical. This paper summarises the business history literature and provides evidence on investor protection and financial development over the long run that challenges the main tenets of the law and finance literature.

The Genesis of Corporate Governance: Nineteenth-Century Irish Joint-Stock Banks

Up until the beginning of the nineteenth century, the corporate form of business enterprise was uncommon in the British Isles because firms could not adopt this organisational form without prior state approval. However, following the repeal of the Bubble Act in 1825, there was a substantial growth in the number of joint-stock companies, especially in the banking, insurance and railways sectors. This growth came about due to the state’s increased disposition towards granting charters and the introduction of legislation which permitted banks to adopt the corporate form without requiring explicit state approval. Although it is commonly believed that the Berle and Means firm, characterised by diffused ownership and a separation of ownership from control, was not prevalent in the Britain until the 1950s at the earliest, the rise of the incorporated business enterprise in the second quarter of the nineteenth century resulted in some firms having diffused ownership and a separation of ownership from control. The first piece of legislation in the British Isles that permitted businesses to form freely as a joint-stock corporation was the Irish Banking Copartnership Regulation Act (1825). This historic piece of legislation permitted Irish banks to form on a joint-stock basis with transferable stock, and granted banks all the privileges normally associated with incorporation except limitation of liability. In this article, we analyse the corporate governance of unlimited liability Irish joint-stock banks. It has been suggested that there may have been extensive shareholder participation in the running of these joint-stock banks up until the collapse of the share mania in 1836/37, and, after this period, these banks became a lot less democratic. However, as well as examining this shareholder voice argument, we will also analyse other corporate governance practices and mechanisms within Irish joint-stock banks. An examination of the corporate governance practices of Irish joint-stock banks is enlightening for several reasons. Firstly, the Agricultural & Commercial Bank of Ireland collapsed in 1836, calling into question the viability of the joint-stock form and the corporate governance of joint-stock banks. Secondly, banks are known to have a peculiar contractual nature which may make them more prone to agency problems, making adequate corporate governance mechanisms all the more important. Thirdly, these jointstock banks had unlimited liability, which would imply that weak governance would not only diminish the value of a shareholder’s investment, but could also endanger their personal wealth. In the next section, we examine the development of the joint-stock bank in Ireland. The following section examines the institutional and legal mechanisms which may have offered protection to shareholders, depositors and note-holders of Irish joint-stock banks. Section four analyses the three Belfast-based banks and suggests that the corporate

The Trading of Unlimited Liability Bank Shares in Nineteenth-Century Ireland: The Bagehot Hypothesis

In the mid-1820s, banks became the first businesses in Great Britain and Ireland to be allowed to form freely on an unlimited liability joint-stock basis. Walter Bagehot warned that their shares would ultimately be owned by widows, orphans, and other impecunious individuals. Another hypothesis is that the governing bodies of these banks, constrained by special legal restrictions on share trading, acted effectively to prevent such shares being transferred to the less wealthy. We test both conjectures using the archives of an Irish joint-stock bank. The results do not support Bagehots hypothesis.

The character and denomination of shares in the Victorian equity market

The seminal work of J. B. Jefferys highlighted two unusual features of the Victorian equity market, namely high share denomination and uncalled capital. This article examines the extent to which publicly traded company stocks in the nineteenth century had these features. It also analyses the effect of these features on stock returns using monthly data for the London Stock Market over the period 1825–70. We find that stocks with unpaid capital earned a higher return, which is consistent with investors being rewarded for the risk of a call on their personal assets. We also find that stocks with a high share denomination earned a lower return, which is consistent with the view that this feature was conducive to superior corporate governance.

DOES LIMITED LIABILITY MATTER?: EVIDENCE FROM NINETEENTH-CENTURY BRITISH BANKING *

The superiority of the corporation over other organizational forms is typically attributed to the fact that every owner has limited liability. The widely-held, but empirically unsubstantiated, view is that the main advantage of limited liability over extended shareholder liability is that the enforcement costs of the latter generally impedes the tradability and liquidity of stock. We use the rich shareholder-liability experience of nineteenth-century British banking to test this standard view. As well as exploring the means by which unlimited liability was enforced, we examine the impact of liability regimes on the tradability and liquidity of stock. Our evidence suggests that liability rules appear to be irrelevant from the perspective of stock tradability and liquidity.

Dispelling the Myth of the Naive Investor during the British Railway Mania, 1845–1846

Anecdotal evidence from the British Railway Mania and other historical financial bubbles suggests that many investors during such episodes are naive, thus contributing to the asset price boom. Using extensive investor records, we find that very few investors during the Railway Mania can be categorized as such. Although some interpretations of the Mania suggest that naive investors were expropriated by railway insiders, our evidence is inconsistent with this view as railway insiders contributed substantial amounts of capital, and their investments performed no better than those made by other experienced investors.