Equity finance: matching liability to power

C. A. E. Goodhart and R. M. Lastra

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

JEL-codes: F3 G3 G32 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020-03-20
New Economics Papers: this item is included in nep-cfn and nep-ore
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Published in Journal of Financial Regulation, 20, March, 2020, 6(1), pp. 1 - 40. ISSN: 2053-4833

Downloads: (external link)
http://eprints.lse.ac.uk/103754/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:103754

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().