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Limited liability and shares’ pricing: sufficient but not necessary

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  • Paolo Maggioni
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    Abstract

    Limited liability has been seen as crucial for the development of capital markets. In this paper I use the CAPM to analyze how a company is priced differently under different liability regimes. I reach the conclusion that as far as the pricing and liquidity of shares is concerned, the positive features of a limited liability regime are common to “pro rata†unlimited liability. The prevalence of the unlimited liability regime over regimes of unlimited liability, prorata (or joint and several) should then be traced in other benefits that limiting liability may bring. Literature and history point to the relationship between bankruptcy procedures and liability regimes as the area where the limited liability regimes may be more cost effective and easier to implement.

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    File URL: http://www.openloc.eu/cms/storage/openloc/working_papers/2011/Maggioni2011.pdf
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    Paper provided by Public policies and local development in its series Openloc Working Papers with number 1115.

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    Date of creation: 2011
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    Handle: RePEc:trn:utwpol:1115

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    Keywords: Corporation and Securities Law;

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    1. Hickson, Charles R. & Turner, John D., 2003. "Shareholder liability regimes in nineteenth-century English banking: The impact upon the market for shares," European Review of Economic History, Cambridge University Press, vol. 7(01), pages 99-125, April.
    2. Acheson, Graeme G. & Turner, John D., 2008. "The death blow to unlimited liability in Victorian Britain: The City of Glasgow failure," Explorations in Economic History, Elsevier, vol. 45(3), pages 235-253, July.
    3. Hickson, Charles R. & Turner, John D. & McCann, Claire, 2005. "Much ado about nothing: the limitation of liability and the market for 19th century Irish bank stock," Explorations in Economic History, Elsevier, vol. 42(3), pages 459-476, July.
    4. Mark I. Weinstein, 2003. "Share Price Changes and the Arrival of Limited Liability in California," The Journal of Legal Studies, University of Chicago Press, vol. 32(1), pages 1-25, 01.
    5. Carr, Jack L & Mathewson, G Frank, 1988. "Unlimited Liability as a Barrier to Entry," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 766-84, August.
    6. Forbes, Kevin F, 1986. "Limited Liability and the Development of the Business Corporation," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(1), pages 163-77, Spring.
    7. Grossman, Peter Z, 1995. "The Market for Shares of Companies with Unlimited Liability: The Case of American Express," The Journal of Legal Studies, University of Chicago Press, vol. 24(1), pages 63-85, January.
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