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The Origins of Limited Liability

Author

Listed:
  • Guillaume Vuillemey

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

Abstract

Limited liability is a key feature of corporate law. Using data on asset prices and capital flows in mid-19th century England, I argue that its liberalization was not decided to relax firms' financing constraints, but to satisfy investors' demand for "safe" stores of value. Limited liability eliminated adverse selection about the quality of other shareholders; stocks could be held to store wealth in diversified portfolios, without extended forms of responsibility. Prices of newly issued stocks are consistent with this hypothesis. Thus, the quest for "safe" stores of value explains not only features of debt markets, but also of equity markets.

Suggested Citation

  • Guillaume Vuillemey, 2023. "The Origins of Limited Liability," Working Papers hal-04414083, HAL.
    • Handle: RePEc:hal:wpaper:hal-04414083
    DOI: 10.2139/ssrn.4351433
    as

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