Does Limited Liability Matter? Evidence from Nineteenth-Century British Banking1

Graeme Acheson

    Research output: Contribution to journalArticle

    19 Citations (Scopus)

    Abstract

    The superiority of the corporation over other organizational forms is typicallyattributed to the fact that every owner has limited liability. The widely-held, butempirically unsubstantiated, view is that the main advantage of limited liability overextended shareholder liability is that the enforcement costs of the latter generallyimpedes the tradability and liquidity of stock. We use the rich shareholder-liabilityexperience of nineteenth-century British banking to test this standard view. As wellas exploring the means by which unlimited liability was enforced, we examine theimpact of liability regimes on the tradability and liquidity of stock. Our evidencesuggests that liability rules appear to be irrelevant from the perspective of stocktradability and liquidity.
    LanguageEnglish
    JournalReview of Law and Economics
    Volume6
    Issue number2
    DOIs
    Publication statusPublished - 1 Apr 2010

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    Liability
    Liquidity
    Limited liability
    Shareholders
    Owners
    Liability rules
    Banking
    Organizational form
    Costs
    Enforcement

    Cite this

    @article{a88924a3a23d4fa8a824d9372a9c31c5,
    title = "Does Limited Liability Matter? Evidence from Nineteenth-Century British Banking1",
    abstract = "The superiority of the corporation over other organizational forms is typicallyattributed to the fact that every owner has limited liability. The widely-held, butempirically unsubstantiated, view is that the main advantage of limited liability overextended shareholder liability is that the enforcement costs of the latter generallyimpedes the tradability and liquidity of stock. We use the rich shareholder-liabilityexperience of nineteenth-century British banking to test this standard view. As wellas exploring the means by which unlimited liability was enforced, we examine theimpact of liability regimes on the tradability and liquidity of stock. Our evidencesuggests that liability rules appear to be irrelevant from the perspective of stocktradability and liquidity.",
    author = "Graeme Acheson",
    note = "Reference text: Acheson, Graeme G., and John D. Turner. 2006. The Impact of Limited Liability on Ownership and Control: Irish Banking, 1877-1914. Economic History Review 59: 320-46. Acheson, Graeme G., and John D. Turner. 2008. The Death Blow to Unlimited Liability in Victorian Britain: The City of Glasgow Failure. Explorations in Economic History 45: 235-53. Alchian, Armen. A., and Susan Woodward. 1987. Reflections on the Theory of the Firm. Journal of Institutional and Theoretical Economics 143: 110-136. Anderson, B. L., and Philip L. Cottrell. 1975. Another Victorian Capital Market: A Study of Banking and Bank Investors on Merseyside. Economic History Review 28: 600-615. Anderson, Gary M., and Robert D.Tollison. 1983. The Myth of the Corporation as a Creation of the State. International Review of Law and Economics 3: 107-120. Barrow, G. L. 1975. The Emergence of the Irish Banking System, 1820-1845. Dublin: Gill and Macmillan Ltd.. Bell, George J. 1858. Commentaries on the Laws of Scotland. 6th ed. Edinburgh: T. & T. Clark. Bhide, A. 1993. The Hidden Costs of Stock Market Liquidity. Journal of Financial Economics 34: 31-51. Brown, Richard. 1903. Early Scottish Joint-Stock Companies. Glasgow: Carter and Pratt. Campbell, R. H. 1967. The Law and The Joint-Stock Company in Scotland. pp. 136- 151 in Studies in Scottish Business History, edited by Peter L. Payne. London: Frank Cass and Co.. Carr, Jack L., and G. F. Mathewson. 1988. Unlimited Liability as a Barrier to Entry. Journal of Political Economy 96: 766-784. Checkland, S. G. 1975. Scottish Banking: A History, 1695-1973. Glasgow: Collins. Chordia, Tarun, Richard Roll, and Avanidhar Subrahmanyam. 2001. Market Liquidity and Trading Activity. Journal of Finance 56: 501-530. Christie, J. R. 1909. Joint Stock Enterprise in Scotland Before the Companies Acts. Juridical Review 21: 128-47. Clark, Francis W. 1864. A Treatise on the Law of Partnership and Joint-Stock Companies According to the Law of Scotland. Edinburgh: T. & T. Clark. 29 Collins, Michael. 1989. The Banking Crisis of 1878. Economic History Review 42: 504-527. Copeland, Thomas E. 1979. Liquidity Changes Following Stock Splits. Journal of Finance 34: 115-141. Crick, W. F. and J. E. Wadsworth. 1936. A Hundred Years of Joint Stock Banking. London: Hodder and Stoughton. Dick, James. 1884. Banking Statistics: A Record of Nine Years’ Progress. Journal of the Institute of Bankers 5: 317-69. Dowd, Kevin. 2009. Moral Hazard and the Financial Crisis. Cato Journal 29: 141-166. Dun, John. 1876. The Banking Institutions, Bullion Reserves, and Non-Legal-Tender Note Circulation of the United Kingdom Statistically Investigated. Journal of the Statistical Society 39: 1-189. England, Catherine. 1988. Agency Costs and Unregulated Banks: Could Depositors Protect Themselves? Cato Journal 7: 771-797. Evans, Lewis T., and Neil C. Quigley. 1995. Shareholder Liability Regimes, Principal-Agent Relationships, and Banking Industry Performance. Journal of Law and Economics 38: 497-520. Fleming, James S. 1883. On the Theory and Practice of Banking in Scotland. Journal of the Institute of Bankers 4: 129-153. Gregory, T. E. 1936. The Westminster Bank Through a Century. London: Westminster Bank Ltd.. Grossman, Peter Z. 1995. The Market for Shares of Companies With Unlimited Liability: The Case of American Express. Journal of Legal Studies 24: 63-85. Grossman, Richard S. 2001. Double Liability and Bank Risk Taking. Journal of Money, Credit and Banking 33: 143-159. Grundfest, J. A. 1992. The Limited Future of Unlimited Liability: A Capital Markets Perspective. Yale Law Journal 102: 387-425. Halpern, Paul, Trebilcock, Michael, and Turnbull, Stuart. 1980. An Economic Analysis of Limited Liability in Corporation Law. University of Toronto Law Journal 30: 117-150. Hall, F. G. 1949. The Bank of Ireland 1783-1946. Dublin: Hodges, Figgis & Co.. Hansmann, Henry, and Kraakman, Reinier. 1991. Toward Unlimited Liability for Corporate Torts. Yale Law Journal 100: 1879-1934. 30 Harris, Ron. 2000. Industrializing English Law: Entrepreneurship and Business Organization. Cambridge: Cambridge University Press. Hickson, Charles R., and John D. Turner. 2003. Trading in the Shares of Unlimited Liability Banks in Nineteenth Century Ireland: The Bagehot Hypothesis. Journal of Economic History 63: 931-958. Hickson, Charles R., John D. Turner, and Claire McCann. 2005. Much Ado About Nothing: The Introduction of Limited Liability and the Market for Nineteenth- Century Irish Bank Stock. Explorations in Economic History 42: 459-76. Hilt, Eric. 2006. Incentives in Corporations: Evidence from the American Whaling Industry. Journal of Law and Economics 49: 197-227. Horwitz, Steven and Howard Bodenhorn. 1994. A Property Rights Approach to Free Banking. Journal des Economistes et des Etudes Humaines 5: 505-519. Jensen, Michael C., and William Meckling. 1976. Theory of the Firm: Managerial Behaviour, Agency Costs and Capital Structure. Journal of Financial Economics 3: 305-360. Killick, J. R., and W. A. Thomas. 1970. The Provincial Stock Exchanges, 1830-1870. Economic History Review 23: 96-111. Kraakman, Reinier. 1998. Unlimited Shareholder Liability. pp.648-54 in The New Palgrave Dictionary of Law and Economics, edited by P. Newman. Macmillan, London, pp.648-654. Lamoreaux, Naomi R. 1998. Partnerships, Corporations, and the Theory of the Firm. American Economic Review Papers and Proceedings 88: 66-71. Lamoreaux, Naomi R, and Jean-Laurent Rosenthal. 2005. Legal Regime and Contractual Flexibility: A Comparison of Business’s Organizational Choices in France and the United States During the Era of Industrialisation. American Law and Economics Review 7: 28-61. Levi, Leone. 1880. The Reconstruction of Joint Stock Banks on the Principle of Limited Liability. The Bankers’ Magazine 40: 468-79. Livermore, Shaw. 1935. Unlimited Liability in Early American Corporations. Journal of Political Economy 43: 674-87. Macey, Jonathan R., and Geoffrey P. Miller. 1992. Double Liability of Bank Shareholders: History and Implications. Wake Forest Law Review 27: 31-62. Munn, Charles W. 1981. The Scottish Provincial Banking Companies 1747-1864. Edinburgh: John Donald. Plumptre, C. C. M. 1882. Grant’s Treatise on the Law Relating to Bankers and Banking Companies. London: Butterworths. 31 Posner, Richard A. 1976. The Rights of Creditors of Affiliated Corporations. University of Chicago Law Review 43: 499-526. Treasury Committee on Bank Amalgamations. 1918. Report of the Treasury Committee on Bank Amalgamations. London: HMSO. Thomas, S. E. 1934. The Rise and Growth of Joint Stock Banking. London: Sir Issac Pitman and Sons. Turner, John D. 2009. Wider Share Ownership?: Investors in English and Welsh Bank Shares in the Nineteenth Century. Economic History Review (forthcoming). Thomas, W. A. 1986. The Stock Exchanges of Ireland. Liverpool: Francis Cairns. Weinstein, Mark I. 2003. Share Price Changes and the Arrival of Limited Liability in California. Journal of Legal Studies 32: 1-25. White, Lawrence H. 1995. Free Banking in Britain: Theory, Experience and Debate 1800-1845. 2nd ed. London: Institute of Economic Affairs. Wilson, A. 1879. Banking Reform: An Essay on the Prominent Dangers and the Remedies They Demand. London: Longmans, Green and Co.. Winton, Andrew. 1993. Limitation of Liability and the Ownership Structure of the Firm. Journal of Finance 48: 487-512. Withers, Hartley, and R.H.I. Palgrave. 1910. National Monetary Commission: The English Banking System. Washington: Government Printing Office. Woodward, Susan. 1985a. Limited Liability in the Theory of the Firm. Journal of Institutional and Theoretical Economics 141: 601-611. Woodward, Susan. 1985b. The Struggle for Fungibility of Joint-Stock Shares As Revealed in W. R. Scott’s Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720. UCLA Working Paper #377.",
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    Does Limited Liability Matter? Evidence from Nineteenth-Century British Banking1. / Acheson, Graeme.

    In: Review of Law and Economics, Vol. 6, No. 2, 01.04.2010.

    Research output: Contribution to journalArticle

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    N1 - Reference text: Acheson, Graeme G., and John D. Turner. 2006. The Impact of Limited Liability on Ownership and Control: Irish Banking, 1877-1914. Economic History Review 59: 320-46. Acheson, Graeme G., and John D. Turner. 2008. The Death Blow to Unlimited Liability in Victorian Britain: The City of Glasgow Failure. Explorations in Economic History 45: 235-53. Alchian, Armen. A., and Susan Woodward. 1987. Reflections on the Theory of the Firm. Journal of Institutional and Theoretical Economics 143: 110-136. Anderson, B. L., and Philip L. Cottrell. 1975. Another Victorian Capital Market: A Study of Banking and Bank Investors on Merseyside. Economic History Review 28: 600-615. Anderson, Gary M., and Robert D.Tollison. 1983. The Myth of the Corporation as a Creation of the State. International Review of Law and Economics 3: 107-120. Barrow, G. L. 1975. The Emergence of the Irish Banking System, 1820-1845. Dublin: Gill and Macmillan Ltd.. Bell, George J. 1858. Commentaries on the Laws of Scotland. 6th ed. Edinburgh: T. & T. Clark. Bhide, A. 1993. The Hidden Costs of Stock Market Liquidity. Journal of Financial Economics 34: 31-51. Brown, Richard. 1903. Early Scottish Joint-Stock Companies. Glasgow: Carter and Pratt. Campbell, R. H. 1967. The Law and The Joint-Stock Company in Scotland. pp. 136- 151 in Studies in Scottish Business History, edited by Peter L. Payne. London: Frank Cass and Co.. Carr, Jack L., and G. F. Mathewson. 1988. Unlimited Liability as a Barrier to Entry. Journal of Political Economy 96: 766-784. Checkland, S. G. 1975. Scottish Banking: A History, 1695-1973. Glasgow: Collins. Chordia, Tarun, Richard Roll, and Avanidhar Subrahmanyam. 2001. Market Liquidity and Trading Activity. Journal of Finance 56: 501-530. Christie, J. R. 1909. Joint Stock Enterprise in Scotland Before the Companies Acts. Juridical Review 21: 128-47. Clark, Francis W. 1864. A Treatise on the Law of Partnership and Joint-Stock Companies According to the Law of Scotland. Edinburgh: T. & T. Clark. 29 Collins, Michael. 1989. The Banking Crisis of 1878. Economic History Review 42: 504-527. Copeland, Thomas E. 1979. Liquidity Changes Following Stock Splits. Journal of Finance 34: 115-141. Crick, W. F. and J. E. Wadsworth. 1936. A Hundred Years of Joint Stock Banking. London: Hodder and Stoughton. Dick, James. 1884. Banking Statistics: A Record of Nine Years’ Progress. Journal of the Institute of Bankers 5: 317-69. Dowd, Kevin. 2009. Moral Hazard and the Financial Crisis. Cato Journal 29: 141-166. Dun, John. 1876. The Banking Institutions, Bullion Reserves, and Non-Legal-Tender Note Circulation of the United Kingdom Statistically Investigated. Journal of the Statistical Society 39: 1-189. England, Catherine. 1988. Agency Costs and Unregulated Banks: Could Depositors Protect Themselves? Cato Journal 7: 771-797. Evans, Lewis T., and Neil C. Quigley. 1995. Shareholder Liability Regimes, Principal-Agent Relationships, and Banking Industry Performance. Journal of Law and Economics 38: 497-520. Fleming, James S. 1883. On the Theory and Practice of Banking in Scotland. Journal of the Institute of Bankers 4: 129-153. Gregory, T. E. 1936. The Westminster Bank Through a Century. London: Westminster Bank Ltd.. Grossman, Peter Z. 1995. The Market for Shares of Companies With Unlimited Liability: The Case of American Express. Journal of Legal Studies 24: 63-85. Grossman, Richard S. 2001. Double Liability and Bank Risk Taking. Journal of Money, Credit and Banking 33: 143-159. Grundfest, J. A. 1992. The Limited Future of Unlimited Liability: A Capital Markets Perspective. Yale Law Journal 102: 387-425. Halpern, Paul, Trebilcock, Michael, and Turnbull, Stuart. 1980. An Economic Analysis of Limited Liability in Corporation Law. University of Toronto Law Journal 30: 117-150. Hall, F. G. 1949. The Bank of Ireland 1783-1946. Dublin: Hodges, Figgis & Co.. Hansmann, Henry, and Kraakman, Reinier. 1991. Toward Unlimited Liability for Corporate Torts. Yale Law Journal 100: 1879-1934. 30 Harris, Ron. 2000. Industrializing English Law: Entrepreneurship and Business Organization. Cambridge: Cambridge University Press. Hickson, Charles R., and John D. Turner. 2003. Trading in the Shares of Unlimited Liability Banks in Nineteenth Century Ireland: The Bagehot Hypothesis. Journal of Economic History 63: 931-958. Hickson, Charles R., John D. Turner, and Claire McCann. 2005. Much Ado About Nothing: The Introduction of Limited Liability and the Market for Nineteenth- Century Irish Bank Stock. Explorations in Economic History 42: 459-76. Hilt, Eric. 2006. Incentives in Corporations: Evidence from the American Whaling Industry. Journal of Law and Economics 49: 197-227. Horwitz, Steven and Howard Bodenhorn. 1994. A Property Rights Approach to Free Banking. Journal des Economistes et des Etudes Humaines 5: 505-519. Jensen, Michael C., and William Meckling. 1976. Theory of the Firm: Managerial Behaviour, Agency Costs and Capital Structure. Journal of Financial Economics 3: 305-360. Killick, J. R., and W. A. Thomas. 1970. The Provincial Stock Exchanges, 1830-1870. Economic History Review 23: 96-111. Kraakman, Reinier. 1998. Unlimited Shareholder Liability. pp.648-54 in The New Palgrave Dictionary of Law and Economics, edited by P. Newman. Macmillan, London, pp.648-654. Lamoreaux, Naomi R. 1998. Partnerships, Corporations, and the Theory of the Firm. American Economic Review Papers and Proceedings 88: 66-71. Lamoreaux, Naomi R, and Jean-Laurent Rosenthal. 2005. Legal Regime and Contractual Flexibility: A Comparison of Business’s Organizational Choices in France and the United States During the Era of Industrialisation. American Law and Economics Review 7: 28-61. Levi, Leone. 1880. The Reconstruction of Joint Stock Banks on the Principle of Limited Liability. The Bankers’ Magazine 40: 468-79. Livermore, Shaw. 1935. Unlimited Liability in Early American Corporations. Journal of Political Economy 43: 674-87. Macey, Jonathan R., and Geoffrey P. Miller. 1992. Double Liability of Bank Shareholders: History and Implications. Wake Forest Law Review 27: 31-62. Munn, Charles W. 1981. The Scottish Provincial Banking Companies 1747-1864. Edinburgh: John Donald. Plumptre, C. C. M. 1882. Grant’s Treatise on the Law Relating to Bankers and Banking Companies. London: Butterworths. 31 Posner, Richard A. 1976. The Rights of Creditors of Affiliated Corporations. University of Chicago Law Review 43: 499-526. Treasury Committee on Bank Amalgamations. 1918. Report of the Treasury Committee on Bank Amalgamations. London: HMSO. Thomas, S. E. 1934. The Rise and Growth of Joint Stock Banking. London: Sir Issac Pitman and Sons. Turner, John D. 2009. Wider Share Ownership?: Investors in English and Welsh Bank Shares in the Nineteenth Century. Economic History Review (forthcoming). Thomas, W. A. 1986. The Stock Exchanges of Ireland. Liverpool: Francis Cairns. Weinstein, Mark I. 2003. Share Price Changes and the Arrival of Limited Liability in California. Journal of Legal Studies 32: 1-25. White, Lawrence H. 1995. Free Banking in Britain: Theory, Experience and Debate 1800-1845. 2nd ed. London: Institute of Economic Affairs. Wilson, A. 1879. Banking Reform: An Essay on the Prominent Dangers and the Remedies They Demand. London: Longmans, Green and Co.. Winton, Andrew. 1993. Limitation of Liability and the Ownership Structure of the Firm. Journal of Finance 48: 487-512. Withers, Hartley, and R.H.I. Palgrave. 1910. National Monetary Commission: The English Banking System. Washington: Government Printing Office. Woodward, Susan. 1985a. Limited Liability in the Theory of the Firm. Journal of Institutional and Theoretical Economics 141: 601-611. Woodward, Susan. 1985b. The Struggle for Fungibility of Joint-Stock Shares As Revealed in W. R. Scott’s Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720. UCLA Working Paper #377.

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    N2 - The superiority of the corporation over other organizational forms is typicallyattributed to the fact that every owner has limited liability. The widely-held, butempirically unsubstantiated, view is that the main advantage of limited liability overextended shareholder liability is that the enforcement costs of the latter generallyimpedes the tradability and liquidity of stock. We use the rich shareholder-liabilityexperience of nineteenth-century British banking to test this standard view. As wellas exploring the means by which unlimited liability was enforced, we examine theimpact of liability regimes on the tradability and liquidity of stock. Our evidencesuggests that liability rules appear to be irrelevant from the perspective of stocktradability and liquidity.

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