Shareholder liability regimes in nineteenth-century English banking: The impact upon the market for shares

Abstract

The 1826 Banking Copartnership Act allowed unlimited liability joint stock banks to form freely for the first time. Such banks were criticised by Walter Bagehot because he believed that impecunious individuals would own their shares. As the 1826 Act crucially contained a post-sale-extended liability restriction, Bagehot's view reduces to whether or not this restriction was effective. This article tests the effectiveness of this restriction by using a simple finance model to measure the risk of the shares of limited and unlimited banks, which traded concurrently during our sample period. Using share price data from 1873 to 1888, obtained from the Investor's Monthly Manual, our results indicate that the perceived risk of the unlimited liability banks was greater, and after the general move to limited liability in 1879, perceived risk fell. Furthermore, we also find that, after controlling for size, the unlimited liability banks tended to have a smaller number of shareholders and stickier share prices.