Corporate Law & Economics of Limited Liability: A Perspective Overview and Some Open Questions!

– Lucas Bento

Limited liability is considered to be “the feature” of corporate law. From a Corporate Law & Economics perspective, for very broad and different economic stimuli and reasons, it is supposed that limited liability provides gains from improving liquidity and diversification.

Although, it is knowledge that in some cases where there is much less separation between management and risk bearing, those gains are minimal while creating a high probability that a firm will engage in a socially excessive level of risk taking. When such cases happen and are studied in closed corporations, they are obviated by the piercing the corporate veil.

Here, we are proposing an overview of the economic and legal reasons of the creation of limited liability rule. We will review in a structured and organized manner as to how such topic has been studied by the mainstream scholars of the area, adding some personal analysis to the topic under combination of more recent studies of behavior law & economics and social development economics.

Also, in this essay, we bring as first publication of our current topic of research at the University of Hamburg, in which we propose that the even in publicly listed corporations, when the major active controlling shareholder figure is known and identified, the lack of well-defined separation of management and risk bearing has very close effects to the closed corporation cases; excepting that piercing the corporate veil in such situations may have potentially even more harmful effects.

Read more here.