SHAREHOLDER LIABILITY REGIMES, PRINCIPAL-AGENT RELATIONSHIPS, AND BANKING INDUSTRY PERFORMANCE

We develop an interpretation of the economics of alternative sharehold er liability regimes that challenges the view that limited liability a lways represents the most efficient form of corporate organization. Un limited liability will prevail when creditors are willing to compensat e shareholders for bearing all of the costs of monitoring management a nd the risk associated with the activities of the firm. When the infor mation about the financial position of the firm that is required to fa cilitate increased risk-bearing by creditors can be provided at costs lower than those associated with unlimited liability, firms will incor porate, Scottish banking in the nineteenth century provides unique dat a on the operation of a market in which firms with limited and unlimit ed liability competed, on the risk premium associated with unlimited l iability shares, and on the innovations in information provision that facilitated the move from unlimited to multiple liability.