Concessionary Contracts, Dividend Policy and Equity Depletion : The Accounting for Public Aids in Early Railway Companies

We study dividend payments and earnings management in railway companies in the first decades of the 20th century. We argue that the historical organization of the Spanish railway industry as a complex net of 99-year concessionary contracts created predictable incentives for earnings management and rent extraction. The countdown to concessions reversals pressured the State, as residual owner, to subsidize the industry during the 1920s. The State granted two types of public aids to railway companies: to finance increases in wages, and to modernize railway material and infrastructure. We provide novel evidence on the regulation of these aids, their accounting, and their association with dividend payments. Overall, our evidence suggests that despite efforts from the State to establish maximum levels or earnings to report and of ‘permitted' dividends, the looming reversal of concessionary contracts gave rise to a principal-principal agency conflict that resulted in maximum dividends and equity depletion