NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Double Liability at Early American Banks

Howard Bodenhorn

NBER Working Paper No. 21494
Issued in August 2015, Revised in January 2017
NBER Program(s):Corporate Finance, Development of the American Economy, Law and Economics

Limited liability is a defining feature of the modern corporation, but it was not always so. By the early 1850s about one-half of all states imposed double liability on bank shareholders. This paper shows that double liability was adopted as deposits increased relative to banknotes and in conjunction with free banking; that double liability was associated with more concentrated bank shareholdings, but had little effect on share liquidity; that it increased the price of bank debt; and, that a regulatory change toward greater shareholder liability increased bank leverage ratios. In forcing bank shareholders to have more “skin in the game,” double liability changed bank investor, creditor and managerial behaviors.

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Document Object Identifier (DOI): 10.3386/w21494

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