Working Paper: CEPR ID: DP13494
Authors: Charles A. Goodhart; Rosa M. Lastra
Abstract: There is widespread concern that the bonus culture for senior managers in limited liability companies is having adverse effects, e.g. on risk-taking, leverage and lower longer-term investment. The moral hazard of limited liability was appreciated in the 19th century, when unlimited or multiple liability, especially for bankers, was widely adopted. Whereas outside, notably retail, investors still need the protection of limited liability, we advocate moving towards a two-tier equity system, primarily for banks, with insiders, senior managers and others with influence over corporate decisions, becoming subject to multiple liability. But the transition costs of doing so suddenly would be great, so our proposal is to start by applying this initially just to Systemically Important Financial Intermediaries.
Keywords: corporate governance; limited liability; two tier equity; senior management regime; institutional investors; banks; banking
JEL Codes: G30; G32; G39; K20; K22; K29; L14; L20; L21; M14; N20; N21; N23; P10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Limited liability (K13) | increased risk-taking by managers (G34) |
| bonus culture for senior managers due to limited liability (M12) | riskier business practices (G32) |
| transition to a two-tier equity system (P20) | reduced risk-taking behaviors (D91) |
| misalignment of interests between equity holders and other stakeholders (G34) | moral hazard (G52) |