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

57 Pages Posted: 24 Mar 2020 Last revised: 7 Jul 2020

See all articles by Yrjo Koskinen

Yrjo Koskinen

Haskayne School of Business, University of Calgary

Nga Nguyen

University of Calgary - Haskayne School of Business

J. Ari Pandes

University of Calgary - Haskayne School of Business

Date Written: July 1, 2020

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 Canadian public firms known as income trusts. We show that the switch from unlimited to limited liability increases the trusts’ net external financing, investments, profitability, payouts, and equity volatility. Our results are stronger for energy trusts, which are more capital-intensive. Furthermore, our event study results show significantly positive cumulative abnormal returns around the introduction of limited liability legislation. 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 (July 1, 2020). 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://contacts.ucalgary.ca/info/ha/profiles/1-7257931

Nga Nguyen

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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