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February 06, 2006


Robert Schwartz

I am purely a doctrinaire lawyer. To me the limited liability of shareholders of a corporation is a direct corrally of the doctrine of separate legal personality. Liabilities of the corporation are its alone and not those of the shareholder.

Any analogy to partnership is false. Partners are liable for partnership debts by reason of their mutual agency. Shareholders are not per se agents nor managers of the corporation and are not imputed with liability.

The real question is why the directors of a corporation, who are its statutory managers, have limited liability.

Dale Wettlaufer

What market are we talking about? The equity market or the capital markets in general? If you are referring to the equity market, I would disagree. This would raise the cost of equity for nearly every publicly-traded company, not to mention privately-held concerns. That would be damaging for the equity market and it would immediately raise the return equity investors demand from every project having an equity component. That would ripple through the economy if there were not some sort of offset.

If we are talking about all capital markets, maybe lower risks to creditors would lower the cost of debt, but if you're trading higher equity cost for lower debt costs, the net effect on the capital market will negative because equity is the majority capital component for publicly-traded corporations.

What are the agency costs of all of this, though? I would think this would just be a deadweight loss to society.

Ben Bernanke

You take the "I" out of "quaint."

Dale Wettlaufer

Uh, I don't think Ben Bernanke is a visiting prof at Maryland and I doubt the Fed chairman would be posting something like this on a blog.

Mac Stevens

"... As for the established company that engages in such shenanigans, the law has many ways to right such wrongs."

No. It doesn't. It bills the taxpayer, is what the law does. The U.S. Senate just approved spending another $800,000,000,000 of our money today, thank you.

I say eliminate limited liability. It is not a right. It is legalized irresponsibility. It violates the rights of victims and creditors. Eliminate it and you'll see a whole new attitude of responsibility all the way around.

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