Double Liability at Early American Banks
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.
Document Object Identifier (DOI): 10.3386/w21494
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