Don't Leave Home Without It: Limited Liability and American Express

Abstract

What is the value of limited liability to the corporation? Financial economists take the value of limited liability for granted and there has been little empirical study of its value. Few natural experiments allow us to estimate the value of limited liability. One of these, however, is the case of American Express Company. It appears that American Express was the last publicly traded unlimited liability firm in the United States, becoming a corporation with limited liability only in 1965. In this paper, I examine the effects of adopting limited liability on the value of American Express shares, and on their risk. Consistent with economic theory and previous empirical research [Weinstein (2003)], I find little effect on firm value, and a reduction in both systematic and unsystematic risk. This paper also contributes to the empirical methodology of event studies.