Shareholder liability and bank failure

Felipe Aldunate, Dirk Jenter, Arthur Korteweg and Peter Koudijs

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

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.

Keywords: limited liability; bank risk taking; financial crises; Great Depression (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 N22 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2021-06-28
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://eprints.lse.ac.uk/118863/ Open access version. (application/pdf)

Related works:
Working Paper: Shareholder Liability and Bank Failure (2021)
Working Paper: Shareholder Liability and Bank Failure (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118863

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