Limited Liability in California: 1928-1931

59 Pages Posted: 12 Oct 2000

See all articles by Mark Weinstein

Mark Weinstein

University of Southern California - Marshall School of Business - Finance and Business Economics Department; University of Southern California - Gould School of Law

Date Written: September 2000

Abstract

Limited liability is generally viewed as the hallmark of the modern business enterprise. Commentators generally feel that limited liability played a major role in economic growth for the last century and a half. Recently, however, economic analyses of limited liability have focused on some potential costs associated with this regime, though most still view limited liability as optimal. Whether or not the advantages of limited liability outweigh the costs is, ultimately, an empirical question. In this paper I provide the first empirical evidence on the effect of adopting limited liability in a jurisdiction that waited until well into the 20 th century do so. I examine the effect of the change in law on incorporation rates and shareholder wealth. I also examine the political economy of change, with an eye toward the motives for the change. Overall, I find no evidence that adopting limited liability when California did, in 1931, had any significant affect on corporations or shareholders. Consistent with economic theory, the change was opposed by groups that extended trade credit. It appears that the main group that wanted to move to limited liability was the organized corporate bar in California.

Suggested Citation

Weinstein, Mark Ira, Limited Liability in California: 1928-1931 (September 2000). Available at SSRN: https://ssrn.com/abstract=244333 or http://dx.doi.org/10.2139/ssrn.244333

Mark Ira Weinstein (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6499 (Phone)
213-740-6650 (Fax)

University of Southern California - Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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