Equity Finance: Matching Liability to Power

32 Pages Posted: 4 Feb 2019

See all articles by Charles Goodhart

Charles Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group

Rosa M. Lastra

Centre for Commercial Law Studies, Queen Mary University of London

Date Written: January 2019

Abstract

There is widespread concern that the bonus culture for senior managers in limited liability companies is having adverse effects, e.g. on risk-taking, leverage and lower longer-term investment. The moral hazard of limited liability was appreciated in the 19th century, when unlimited or multiple liability, especially for bankers, was widely adopted. Whereas outside, notably retail, investors still need the protection of limited liability, we advocate moving towards a two-tier equity system, primarily for banks, with insiders, senior managers and others with influence over corporate decisions, becoming subject to multiple liability. But the transition costs of doing so suddenly would be great, so our proposal is to start by applying this initially just to Systemically Important Financial Intermediaries.

Keywords: Banking, banks, corporate governance, institutional investors, limited liability, Senior Management Regime, Two Tier Equity

JEL Classification: G30, G32, G39, K20, K22, K29, L14, L20, L21, M14,

Suggested Citation

Goodhart, Charles A.E. and Lastra, Rosa M., Equity Finance: Matching Liability to Power (January 2019). CEPR Discussion Paper No. DP13494, Available at SSRN: https://ssrn.com/abstract=3328505

Charles A.E. Goodhart (Contact Author)

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)

Rosa M. Lastra

Centre for Commercial Law Studies, Queen Mary University of London ( email )

67-69 Lincoln's Inn Fields
London, WC2 3JB
United Kingdom
+44 20 7882 8070 (Phone)
+44 20 8980 8101 (Fax)

HOME PAGE: http://www.law.qmul.ac.uk/staff/lastra.html

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