Substitutes for legal protection: corporate governance and dividends in Victorian Britain1

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 Tobin's 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.