Does Limited Liability Matter? Evidence from a Quasi-Natural Experiment
71 Pages Posted: 24 Mar 2020 Last revised: 19 Mar 2021
Date Written: March 14, 2021
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: Suggested Citation