Cookies?
Library Header Image
LSE Research Online LSE Library Services

Equity finance: matching liability to power

Goodhart, C. A. E. and Lastra, R. M. (2020) Equity finance: matching liability to power. Journal of Financial Regulation, 6 (1). 1 - 40. ISSN 2053-4833

[img] Text (EquityFinance) - Accepted Version
Repository staff only until 11 March 2022.

Download (456kB) | Request a copy
Identification Number: 10.1093/jfr/fjz010

Abstract

In this article we question the wisdom of limited liability for all equity holders in the case of banks and systemically important financial institutions (SIFIs), though our proposals could be extended to all public limited companies. Limited liability can be a major source of moral hazard and excessive risk taking—a privilege that allows shareholders to enjoy the upside from their commercial activity while limiting their exposure in the event of failure. We propose that there should be two different classes of equity for banks and SIFIs. The division should be between outsiders, with no inside knowledge of the working of the firm and/or ability to control its decisions, and insiders, who have both the information and capacity to influence corporate decision-making. Outsiders would remain with limited liability, while multiple liability (double, triple, and potentially unlimited) would apply to insiders. The purpose of our proposal is to shift the costs of failure back to those who have responsibility for taking these decisions. The idea of financial liability ‘with teeth’—which is rooted in history—provides an innovative solution that improves the incentives for managers to take responsible decisions, and promotes a radical change in the structure of capitalism—addressing the unfairness of the current system which has enhanced inequality and encouraged populism.

Item Type: Article
Official URL: https://academic.oup.com/jfr
Additional Information: © 2020 The Authors
Divisions: Financial Markets Group
Subjects: H Social Sciences > HG Finance
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Date Deposited: 13 Mar 2020 09:15
Last Modified: 10 Sep 2020 23:27
URI: http://eprints.lse.ac.uk/id/eprint/103754

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics