The Demise of Double Liability as an Optimal Contract for Large-Bank Stockholders
This paper tests the optimal-contracting hypothesis, drawing upon data from a natural experiment that ended during the Great Depression. The subjects of our experiment are bank stockholders. The experimental manipulation concerns the imposition of state or federal restrictions on the contracts they write with bank creditors. We contrast stockholders that were subject to the now-conventional privilege of limited liability with stockholders that faced an additional liability in liquidation tied to the par value of the bank's capital. Our tests show that optimal contracting theory can provide an explanation both for the long survival of extended-liability rules in banking and for why they were abandoned in the 1930s.
|Date of creation:||Dec 1996|
|Publication status:||published as Edward K. Kane & Berry K. Wilson, 1997. "The demise of double liability as an optimal contract for large-bank stockholders," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 374-401.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Charles W. Calomiris & Berry Wilson, 1996.
"Bank capital and portfolio management: the 1930s capital crunch and scramble to shed risk,"
521, Federal Reserve Bank of Chicago.
- Charles W. Calormiris & Berry Wilson, 1998. "Bank Capital and Portfolio Management: The 1930's Capital Crunch and Scramble to Shed Risk," NBER Working Papers 6649, National Bureau of Economic Research, Inc.
- Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-785, July.
- Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
- Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
- George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
- Edward J. Kane, 1996. "Foundations of financial regulation," Proceedings 511, Federal Reserve Bank of Chicago.
- Franklin Allen, Douglas Gale, 1988. "Optimal Security Design," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 229-263.
- Franklin Allen & Douglas Gale, "undated". "Optimal Security Design," Rodney L. White Center for Financial Research Working Papers 26-87, Wharton School Rodney L. White Center for Financial Research.
- Zender, Jaime F, 1991. " Optimal Financial Instruments," Journal of Finance, American Finance Association, vol. 46(5), pages 1645-1663, December.
- 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 766-784, August.
- Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
- Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
- Winton, Andrew, 1993. " Limitation of Liability and the Ownership Structure of the Firm," Journal of Finance, American Finance Association, vol. 48(2), pages 487-512, June. Full references (including those not matched with items on IDEAS)