Limited liability and corporate governance

An Economic Analysis of Limited Shareholder Liability in Contractual Claims A number of arguments have been advanced in defense of limited liability for contractual claims. First, it saves negotiations costs because it is the liability arrangement which contractual parties generally prefer. If corporation law adopts as it as the default rule, contractual parties need not incur the time and the resources to negotiate for it. Second, limited liability saves monitoring costs. Under limited liability, monitoring of corporate managers will be mostly done by the creditors, which are generally assumed to have lower information costs than the shareholders. Third, corporate default risks rest on the creditors under limited liability, which is believed to be an efficient arrangement because creditors are better able to diversify their risks than shareholders. Lastly, limited liability is pivotal to the functioning of the capital markets.

Objectives
• To study the detailed view on limited liability
• To analyse it in the legal and economic perspectives

Source of Study

Primary sources: Newspapers
Journals
Books
Government orders
Secondary sources: E-source