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Equity finance: matching liability to power

Goodhart, C. A. E. and Lastra, Rosa M. (2019) Equity finance: matching liability to power. CEPR discussion papers (DP13494). Centre for Economic Policy Research (CEPR), London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Additional Information: © 2019 The Authors
Divisions: Financial Markets Group
Subjects: H Social Sciences > HG Finance
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
JEL classification: G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
G - Financial Economics > G3 - Corporate Finance and Governance > G39 - Other
K - Law and Economics > K2 - Regulation and Business Law > K20 - General
K - Law and Economics > K2 - Regulation and Business Law > K22 - Corporation and Securities Law
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships; Contracts and Reputation; Networks
M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration > M14 - Corporate Culture; Social Responsibility
N - Economic History > N2 - Financial Markets and Institutions > N20 - General, International, or Comparative
N - Economic History > N2 - Financial Markets and Institutions > N22 - U.S.; Canada: 1913-
N - Economic History > N2 - Financial Markets and Institutions > N23 - Europe: Pre-1913
P - Economic Systems > P1 - Capitalist Systems > P10 - General
Date Deposited: 07 Feb 2019 14:24
Last Modified: 14 Nov 2019 00:50
URI: http://eprints.lse.ac.uk/id/eprint/100058

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