Working Paper: NBER ID: w21494
Authors: Howard Bodenhorn
Abstract: Limited liability is a defining feature of the modern corporation, but it was not always so. By the early 1850s about one-half of all states imposed double liability on bank shareholders. This paper shows that double liability was adopted as deposits increased relative to banknotes and in conjunction with free banking; that double liability was associated with more concentrated bank shareholdings, but had little effect on share liquidity; that it increased the price of bank debt; and, that a regulatory change toward greater shareholder liability increased bank leverage ratios. In forcing bank shareholders to have more “skin in the game,” double liability changed bank investor, creditor and managerial behaviors.
Keywords: double liability; banking; shareholder behavior; leverage ratios
JEL Codes: G21; K22; N21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Adoption of double liability (G33) | Increase in bank leverage ratios (G21) |
| Adoption of double liability (G33) | Increased concentration in bank shareholdings (G21) |
| Adoption of double liability (G33) | No effect on share liquidity (G19) |
| Adoption of double liability (G33) | Reduced discount in secondary banknote markets (E43) |