For Richer, For Poorer: Banker's Liability and Risk Taking in New England, 1867-1880

For Richer, For Poorer: Banker's Liability and Risk Taking in New England, 1867-1880

By
Peter A.E. Koudijs, Laura Salisbury, Gurpal Sran
forthcoming Journal of Finance. October
2019

We study whether banks are riskier if managers have less liability. We focus on New England between 1867 and 1880 and consider the introduction of marital property laws that limited liability for newly wedded bankers. We find that banks with managers who married after a law had higher leverage, delayed the recognition of losses, made more risky and fraudulent loans, and lost more capital and deposits in the Long Depression of 1873-1878. These effects were most pronounced for bankers with the largest reduction in liability. We find no evidence that limiting liability increased firm investment at the county level.

Best Paper in Corporate Finance, Annual FMA conference, 2017
Best Paper in Corporate Finance, SFS Cavalcades, 2018