The Origins of Limited Liability: Catering to Safety Demand with Investors' Irresponsibility

Abstract
Limited liability is a key feature of corporate law. Using data on asset prices and capital flows in mid-19th century England, I argue that its liberalization was not decided to relax firms' financing constraints, but to satisfy investors' demand for "safe" stores of value. Limited liability eliminated adverse selection about the quality of other shareholders; stocks could be held to store wealth in diversified portfolios, without extended forms of responsibility. Prices of newly issued stocks are consistent with this hypothesis. Thus, the quest for "safe" stores of value explains not only features of debt markets, but also of equity markets.

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About the speaker
Guillaume Vuillemey is an associate professor of finance at HEC Paris, associate researcher at CEPR (London), and associate researcher with the French banking regulator (ACPR)’s chair on systemic risk. His research fields are banking, financial stability, corporate social responsibility and economic history. He has published numerous research articles, notably in the Journal of Finance, the Review of Financial Studies and the Journal of Financial Economics.