Abstract - Dividend Policies in an Unregulated Market: The London Stock Exchange, 1900-1905

In perfect and complete financial markets Miller and Modigliani (1961) show that a firm's value is unaffected by its dividend policy. Taxation, asymmetric information, incomplete contracts, institutional constraints, and transaction costs cause their theorem to fail in practice. We examine the effects of dividend policies on 312 securities that were listed on the London Stock Exchange between 1900 and 1905. The London Stock Exchange operated in an environment of very low taxation and an absence of institutional constraints. This allows us to investigate the worthiness of signalling and agency theories of dividend policy in a setting where many of the imperfections of modern markets do not exist.

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