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Shareholder liability and bank failure

Aldunate, Felipe, Jenter, Dirk ORCID: 0000-0003-4168-9329, Korteweg, Arthur and Koudijs, Peter (2021) Shareholder liability and bank failure. Financial Markets Group Discussion Papers (835). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

Does enhanced shareholder liability reduce bank failure? We compare the performance of around 4,200 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. The distress rate of limited liability banks was 29% higher than that of banks with enhanced liability. Results are robust to a diff-in-diff analysis incorporating nationally-regulated banks (which faced the same regulations everywhere) and are not driven by other differences in state regulations, Fed membership, local characteristics, or differential selection into state-regulated banks. Our results suggest that exposing shareholders to more downside risk can successfully reduce bank failure.

Item Type: Monograph (Discussion Paper)
Official URL: https://www.fmg.ac.uk/
Additional Information: © 2021 The Authors
Divisions: Finance
Subjects: H Social Sciences > HG Finance
H Social Sciences > HC Economic History and Conditions
JEL classification: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
N - Economic History > N2 - Financial Markets and Institutions > N22 - U.S.; Canada: 1913-
Date Deposited: 18 May 2023 15:12
Last Modified: 16 Sep 2023 00:00
URI: http://eprints.lse.ac.uk/id/eprint/118863

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