Does Limited Liability Matter? Evidence from a Quasi-Natural Experiment

Does Limited Liability Matter? Evidence from a Quasi-Natural Experiment

Yrjö Koskinen, Nga Nguyen, J. Ari Pandes

Series number :

Serial Number: 
740/2021

Date posted :

March 14 2021

Last revised :

March 22 2021
SSRN Share

Keywords

  • Limited Liability • 
  • Income Trusts • 
  • financing • 
  • investments

We use the enactment of limited liability legislation across Canadian provinces to examine the effect of the change in liability status on firm outcomes for a group of public firms known as income trusts. We show that the switch from unlimited to limited liability increases trusts' institutional ownership, net external financing, investments, profitability, payouts, and riskiness.

Our results are stronger for energy trusts, which are more capital-intensive and face potentially greater liability risks. Our event study shows positive cumulative abnormal returns around the legal changes. Overall, we present a novel approach to test the impact of limited liability on firms.

 

Authors

Real name:
J. Ari Pandes
Real name:
Nga Nguyen