Shareholder Liability and Bank Failure

59 Pages Posted: 5 Dec 2019

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

Stanford GSB; National Bureau of Economic Research (NBER)

Date Written: November 20, 2019

Abstract

Does additional shareholder liability reduce bank failure? We compare the performance of around 4,400 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. We find that additional shareholder liability reduced bank failure by 30%. Results are robust to a diff-in-diff analysis incorporating National banks (which faced the same regulations in every state), and are not driven by other differences in state regulation, FED membership, or differential selection into state and nationally regulated banks. Our results suggest that exposing shareholders to more downside risk reduces bank risk taking.

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

JEL Classification: G30, G32, G34, G38, G20, G21, G28

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-bcf.usc.edu/~korteweg/

Peter Koudijs

Stanford GSB ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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