The Origins of Limited Liability: Catering to Safety Demand with Investors' Irresponsibility

Guillaume Vuillemey

No 17910, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Limited liability is a key feature of corporate law. Using data on asset prices and capital flows in mid-19th century England, I argue that its liberalization was not decided to relax firms' financing constraints, but to satisfy investors' demand for "safe" stores of value. Limited liability eliminated adverse selection about the quality of other shareholders; stocks could be held to store wealth in diversified portfolios, without extended forms of responsibility. Prices of newly issued stocks are consistent with this hypothesis. Thus, the quest for "safe" stores of value explains not only features of debt markets, but also of equity markets.

Keywords: Limited liability; Safe assets; Corporate social responsibility; Law and economics (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2023-02
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