Share Price Changes and the Arrival of Limited Liability in California

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.