Shareholder Liability and Bank Failure

73 Pages Posted: 5 Dec 2019 Last revised: 29 Jun 2021

See all articles by Felipe Aldunate

Felipe Aldunate

Pontifical Catholic University of Chile

Dirk Jenter

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Peter Koudijs

Erasmus University Rotterdam

Multiple version iconThere are 2 versions of this paper

Date Written: November 20, 2019

Abstract

Does enhanced shareholder liability reduce bank failure? We compare the performance of around 4,200 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. The distress rate of limited liability banks was 29% higher than that of banks with enhanced liability. Results are robust to a diff-in-diff analysis incorporating nationally-regulated banks (which faced the same regulations everywhere) and are not driven by other differences in state regulations, Fed membership, local characteristics, or differential selection into state-regulated banks. Our results suggest that exposing shareholders to more downside risk can successfully reduce bank failure.

Keywords: Bank Risk Taking, Limited Liability, Double Liability, Financial Crises, Great Depression

JEL Classification: G21, G28, G32, N22

Suggested Citation

Aldunate, Felipe and Jenter, Dirk and Korteweg, Arthur G. and Koudijs, Peter, Shareholder Liability and Bank Failure (November 20, 2019). Available at SSRN: https://ssrn.com/abstract=3490815 or http://dx.doi.org/10.2139/ssrn.3490815

Felipe Aldunate

Pontifical Catholic University of Chile ( email )

Vicuna Mackenna 4860
Santiago, 99999
Chile

Dirk Jenter (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/jenter/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Arthur G. Korteweg

University of Southern California - Marshall School of Business ( email )

3670 Trousdale Parkway
Los Angeles, CA 90089
United States

HOME PAGE: http://www.marshall.usc.edu/personnel/arthur-korteweg

Peter Koudijs

Erasmus University Rotterdam ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands

HOME PAGE: http://sites.google.com/view/peter-koudijs/home?authuser=0

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