Knowledge that Transforms

Abstract Why do firms pay dividends? To answer this question, we use a hand-collected data set of companies traded on the London stock market between 1825 and 1870. As tax rates were effectively zero, the capital market was unregulated, and there were no institutional stockholders, we can rule out these potential determinants ex ante. We find that, even though they were legal, share repurchases were not used by firms to return cash to shareholders. Instead, our evidence provides support for the information–communication explanation for dividends, while providing little support for agency, illiquidity, catering, or behavioral explanations.

Abstract Mutual funds typically invest a disproportionately large portion of their portfolio in one industry (main industry). We present a simple theoretical model to demonstrate that better mutual fund managers make larger investments in the important supplier/customer industries related to the main industry. Consistent with our theory, empirical tests on a large sample of mutual funds show that investment in related industries is positively associated with fund performance and plays a more significant role in explaining fund performance than investment in the main industry. Furthermore, the positive relation between main investment and fund performance obtains only when related investment is high.