While we associate the U.K. with a high level of investor protection, this was not the case in the first half of the twentieth century - U.K. capital markets were marked by an absence of investor protection and few common law rights for minorities. Notwithstanding this, securities markets flourished. There were a large number of listed firms, companies issued substantial amounts of equity and inside ownership diminished rapidly. Much of the equity issuance arose from share exchanges in mergers and acquisitions and these in turn were the main cause of dilution of inside ownership. They relied on informal relations of trust between directors and shareholders. When formal regulation (both statutory and self-regulation) was introduced in the second half of the century, it had no effect on equity issuance or dispersion. Instead, it was associated with a much higher level of trading of shares as reflected in membership of controlling coalitions of shareholders and in the emergence of a market for corporate control. These results cast doubt on the law and finance explanation of the development of financial markets and suggest that growth of equity and dispersion of ownership in the U.K. relied more on informal relations of trust than on formal systems of regulation.
