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Share Price Changes and the Arrival of Limited Liability in California

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  • Mark I. Weinstein

Abstract

What effect does limited liability have on share values? This question is difficult to answer because active stock markets did not develop until the rise of corporate limited liability in the nineteenth century. Previous research has shown that one company with pro rata limited liability, American Express, was actively traded until the 1960s. However, no one has examined the price effect of a change from unlimited to limited liability. The history of corporate law in California provides a natural experiment that can be used to examine the effect of limited liability. Until 1929, all California corporations had pro rata unlimited liability. By a process that lasted until 1931, California adopted limited liability for corporations. In the paper I provide the first empirical examination of the effect that this move had on share prices. I find no evidence of share price changes associated with the change in the liability regime.

Suggested Citation

  • Mark I. Weinstein, 2003. "Share Price Changes and the Arrival of Limited Liability in California," The Journal of Legal Studies, University of Chicago Press, vol. 32(1), pages 1-25, January.
    • Handle: RePEc:ucp:jlstud:v:32:y:2003:p:1-25
    DOI: 10.1086/344559
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    References listed on IDEAS

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    1. Shaw Livermore, 1935. "Unlimited Liability in Early American Corporations," Journal of Political Economy, University of Chicago Press, vol. 43(5), pages 674-674.
    2. Forbes, Kevin F, 1986. "Limited Liability and the Development of the Business Corporation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(1), pages 163-177, Spring.
    3. Grossman, Peter Z, 1995. "The Market for Shares of Companies with Unlimited Liability: The Case of American Express," The Journal of Legal Studies, University of Chicago Press, vol. 24(1), pages 63-85, January.
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    Cited by:

    1. Ulrike Malmendier, 2009. "Law and Finance "at the Origin"," Journal of Economic Literature, American Economic Association, vol. 47(4), pages 1076-1108, December.
    2. Paolo Maggioni, 2011. "Limited liability and shares’ pricing: sufficient but not necessary," Openloc Working Papers 1115, Public policies and local development.
    3. Paolo Maggioni, 2011. "The introduction of limited liability in nineteenth century England," Openloc Working Papers 1116, Public policies and local development.
    4. Mark I. Weinstein, 2008. "Don't Buy Shares without It: Limited Liability Comes to American Express," The Journal of Legal Studies, University of Chicago Press, vol. 37(1), pages 189-227, January.
    5. Ilgmann, Cordelius, 2011. "The advent of corporate limited liability in Prussia 1843," CAWM Discussion Papers 46, University of Münster, Münster Center for Economic Policy (MEP).
    6. Grant Fleming & Frank Liu & David Merrett & Simon Ville, 2022. "Share ownership and the introduction of no liability legislation in nineteenth-century Australia," CEH Discussion Papers 11, Centre for Economic History, Research School of Economics, Australian National University.
    7. Jiaqi Qin & Yan Sun, 2023. "Unveil the veil of limited liability: Evidence from firm investment," The Financial Review, Eastern Finance Association, vol. 58(3), pages 485-511, August.
    8. Steven G. Medema, 2020. "The Coase Theorem at Sixty," Journal of Economic Literature, American Economic Association, vol. 58(4), pages 1045-1128, December.
    9. Bargeron, Leonce & Lehn, Kenneth, 2017. "Limited liability and share transferability: An analysis of California firms, 1920–1940," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 451-468.

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