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Synthetic unlimited liability

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  • Miller, Stephen Matteo

Abstract

A synthetic analog of unlimited liability exists to curb executive risk-taking. Total shares liability multiplies an executive's fraction of shares held by the costs of restoring the corporation's solvency. I illustrate using Spring 2023 bank failures. Total options liability comes from executives selling a put for each call received.

Suggested Citation

  • Miller, Stephen Matteo, 2024. "Synthetic unlimited liability," Economics Letters, Elsevier, vol. 241(C).
    • Handle: RePEc:eee:ecolet:v:241:y:2024:i:c:s0165176524003057
    DOI: 10.1016/j.econlet.2024.111821
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    References listed on IDEAS

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    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Joshua R. Hendrickson, 2014. "Contingent Liability, Capital Requirements, and Financial Reform," Cato Journal, Cato Journal, Cato Institute, vol. 34(1), pages 129-144, Winter.
    3. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
    4. Salter, Alexander W. & Veetil, Vipin & White, Lawrence H., 2017. "Extended shareholder liability as a means to constrain moral hazard in insured banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 153-160.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bailouts; Bank failures; Contingent liability; Executive compensation; Unlimited liability;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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