Dividend Policies in an Unregulated Market : The London Stock Exchange 1895-1905

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 make dividend policy important. We examine the effects of dividend policies on 469 British firms between 1895 and 1905. These firms operated in an environment of very low taxation and an absence of institutional constraints. We find strong support for asymmetric information theories of dividend policy, and little support for agency models