Shareholder Liability and Bank Failure

76 Pages Posted: 14 Jul 2021

See all articles by Dirk Jenter

Dirk Jenter

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Felipe Aldunate

Pontificia Universidad Católica de Chile

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Peter Koudijs

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: June 1, 2021

Abstract

Does enhanced shareholder liability reduce bank failure? We compare the performance of around 4,200 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. The distress rate of limited liability banks was 29% higher than that of banks with enhanced liability. Results are robust to a diff-in-diff analysis incorporating nationally-regulated banks (which faced the same regulations everywhere) and are not driven by other differences in state regulations, Fed membership, local characteristics, or differential selection into state-regulated banks. Our results suggest that exposing shareholders to more downside risk can successfully reduce bank failure.

JEL Classification: G21, G28, G32, N22

Suggested Citation

Jenter, Dirk and Aldunate, Felipe and Korteweg, Arthur G. and Koudijs, Peter, Shareholder Liability and Bank Failure (June 1, 2021). CEPR Discussion Paper No. DP16309, Available at SSRN: https://ssrn.com/abstract=3886782

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

Felipe Aldunate

Pontificia Universidad Católica de Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

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.marshall.usc.edu/personnel/arthur-korteweg

Peter Koudijs

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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