The Demise of Double Liability as an Optimal Contract for Large-Bank Stockholders

31 Pages Posted: 27 Jun 2000 Last revised: 28 Jun 2010

See all articles by Berry K. Wilson

Berry K. Wilson

Pace University - Department of Finance and Economics

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: December 1996

Abstract

This paper tests the optimal-contracting hypothesis, drawing upon data from a natural experiment that ended during the Great Depression. The subjects of our experiment are bank stockholders. The experimental manipulation concerns the imposition of state or federal restrictions on the contracts they write with bank creditors. We contrast stockholders that were subject to the now-conventional privilege of limited liability with stockholders that faced an additional liability in liquidation tied to the par value of the bank's capital. Our tests show that optimal contracting theory can provide an explanation both for the long survival of extended-liability rules in banking and for why they were abandoned in the 1930s.

Suggested Citation

Wilson, Berry K. and Kane, Edward J., The Demise of Double Liability as an Optimal Contract for Large-Bank Stockholders (December 1996). NBER Working Paper No. w5848. Available at SSRN: https://ssrn.com/abstract=225633

Berry K. Wilson (Contact Author)

Pace University - Department of Finance and Economics ( email )

Lubin School of Business
New York, NY 10038
United States

Edward J. Kane

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
520-299-5066 (Phone)
617-552-0431 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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