Does Limited Liability Matter? Evidence from a Quasi-Natural Experiment

71 Pages Posted: 24 Mar 2020 Last revised: 19 Mar 2021

See all articles by Yrjo Koskinen

Yrjo Koskinen

Haskayne School of Business, University of Calgary; European Corporate Governance Institute (ECGI)

Nga Nguyen

Universite du Quebec a Montreal; University of Calgary - Haskayne School of Business

J. Ari Pandes

University of Calgary - Haskayne School of Business

Date Written: March 14, 2021

Abstract

We use the enactment of limited liability legislation across Canadian provinces to examine the effect of the change in liability status on firm outcomes for a group of public firms known as income trusts. We show that the switch from unlimited to limited liability increases trusts’ institutional ownership, net external financing, investments, profitability, payouts, and riskiness. Our results are stronger for energy trusts, which are more capital-intensive and face potentially greater liability risks. Our event study shows positive cumulative abnormal returns around the legal changes. Overall, we present a novel approach to test the impact of limited liability on firms.

Keywords: Limited Liability, Income Trusts, Financing, Investments

JEL Classification: D22, G32, G38, K20, L21, P12

Suggested Citation

Koskinen, Yrjo J and Nguyen, Nga and Pandes, J. Ari, Does Limited Liability Matter? Evidence from a Quasi-Natural Experiment (March 14, 2021). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, European Corporate Governance Institute – Finance Working Paper No. 740/2021, Available at SSRN: https://ssrn.com/abstract=3554101 or http://dx.doi.org/10.2139/ssrn.3554101

Yrjo J Koskinen

Haskayne School of Business, University of Calgary ( email )

SH 154, 2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
+1-403-220-5540 (Phone)

HOME PAGE: http://https://haskayne.ucalgary.ca/haskayne_info/profiles/yrjo-koskinen

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/yrj%C3%B6-koskinen

Nga Nguyen

Universite du Quebec a Montreal ( email )

Montréal, QC
Canada
4034020856 (Phone)
H3C 1H3 (Fax)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada

J. Ari Pandes (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
403 220-4350 (Phone)

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