Limited liability and corporate efficiency

Abstract

This paper argues a controlling owner's limited liability can help a regulator correct the externalities a firm imposes. It suggests limited liability prohibits a controlling owner from self-dealing with an external investor and enhances business transparency by limiting the set of financial contracts that are privately feasible, allowing an uninformed regulator to acquire private information that is required to induce efficiency. It also predicts the diversity of corporate regulation and capital structure observed in practice. Show more