Does Limited Liability Matter? Evidence from a Quasi-Natural Experiment
57 Pages Posted: 24 Mar 2020 Last revised: 7 Jul 2020
Date Written: July 1, 2020
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
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