Equity Finance: Matching Liability to Power

Charles Goodhart and Rosa Lastra

No 13494, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Corporate governance; Limited liability; Two tier equity; Senior management regime; Institutional investors; Banks; Banking (search for similar items in EconPapers)
JEL-codes: G30 G32 G39 K20 K22 K29 L14 L20 L21 M14 N20 N21 N23 P10 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-cfn and nep-law
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Citations: View citations in EconPapers (2)

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