In the early stock market in London there were substantial risks of non-payment and fraud. (Mortimer, 1801) According to Hobbesian theory, we would expect stock markets to develop only after government has implemented rules and regulations to eliminate these problems. The historical account, however, provides evidence that solutions to these problems did not come from the state. This article outlines the emergence of the London Stock Exchange, which was created by eighteenth century brokers who transformed coffeehouses into private clubs that created and enforced rules. Rather than relying on public regulation to enforce contracts and reduce fraud, brokers consciously found a way to solve their dilemmas by forming a self-policing club.

The Emergence of the London Stock Exchange as a Self-Policing Club

https://mpra.ub.uni-muenchen.de/25415/1/MPRA_paper_25415.pdf

The Emergence of the London Stock Exchange as a Self- Policing Club

The market for joint stock shares in eighteenth-century England is often portrayed as an underdeveloped and flawed mechanism for resource allocation, which in turn is cited to explain the paucity of shares actually traded. This article questions that interpretation, both by inquiring whether the requisite institutions for a functional market were present, and by constructing a new time series of eighteenth-century share prices and exposing them to a test of the efficient markets hypothesis. Because the stock exchange is found to exhibit most of the conventionally defined characteristics of an effective market, the article concludes by outlining the case for skepticism with respect to a common theme in economic history: the idea that the purported superiority of market resource allocation over alternative non-market forms (in the absence of rigidities due to underdevelopment or government interference) is an unambiguous conclusion in every historical context.

The Rise (and Retreat) of a Market: English Joint Stock Shares in the Eighteenth Century

Social return on investment-Development and convergence.

Although firms have been distributing dividends to their shareholders for four centuries (Baskin, 1988), the motivation for this corporate policy is under debate in the academic community. In an early paper, Black (1976, p. 5) coined the term the “dividends puzzle” to illustrate the poor understanding of dividend payment policy: “The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don’t fit together.” Over the years, dozens of theories have attempted to explain the dividends phenomenon with no consensus reached. Many of the theories view agents as rational and dividends either serve as an efficient way to resolve agency problems or as a signaling device to mitigate information asymmetry problems. Allen and Michaely (2003), Frankfurter and Wood (2006), Baker (2009), and DeAngelo, DeAngelo, and Skinner (2009) provide excellent reviews of these theories and the related empirical facts. After reviewing the literature, Allen and Michaely (2003) and Frankfurter and Wood (2006) conclude that theories based on agency or signaling are not consistent with the empirical evidence and that the question of why firms distribute dividends remains a puzzle. DeAngelo et al., however, reach a different conclusion and argue that asymmetric information could provide an explanation for the dividends phenomenon. This chapter reviews the main stylized facts about dividends and examines the behavioral theories that attempt to explain the evidence. Given the focus on the behavioral perspective, this chapter reexamines and reclassifies some of the empirical facts that previous researchers have used to support rational theories. As such, it does not replace the many surveys written about dividends over the years (e.g., Allen and Michaely, 2003; DeAngelo et al., 2009). Rather, this chapter tries to assess whether the empirical evidence is consistent with a departure from rational behavior on the part of investors or managers. The role of behavioral finance in explaining the existence of dividends is debated as a matter of academic dispute. Miller (1986) presents a traditional argument against behavioral finance by contending that behavioral theories may be able to explain the micro-behavior of agents, but that rational theories should suffice to explain the aggregate behavior of firms. Frankfurter and Lane (1992) and Frankfurter and Wood (2006) emphasize the normative aspects of dividend payments

E. Morgan

Papers

The London Stock Exchange