The Market for Shares of Companies with Unlimited Liability: The Case of American Express

Peter Z Grossman

The Journal of Legal Studies, 1995, vol. 24, issue 1, 63-85

Abstract: If share ownership entailed unlimited liability, would there be an active stock market? Some legal scholars have maintained that no liquid stock market could exist. Others have claimed the result would depend on the specific liability rule. But little empirical evidence has been cited to support any single theory. This article tests four theories of the effect of liability rules on stock market behavior through a study of trading in shares of the American Express Company during the 1950s, when these shares carried pro rata unlimited liability. This study shows that American Express stock traded regularly among a diverse group of shareholders and was not deemed especially risky by the market. The evidence suggests that limited liability is not a necessary condition for the functioning of markets for company shares. Copyright 1995 by the University of Chicago.

Date: 1995
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