PAM_334_Fall_2008_Lecture_7 - PAM3340 Lecture7...

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PAM 3340 Lecture 7 PS 1 due Tuesday Agenda: Limited liability defined Benefits and costs Exceptions: Piercing cases Managerial risk preferences
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Limited Liability Definition : Shareholders are not  personally   liable  for the debts and obligations of the  corporation in the event those are not fulfilled;  i.e. liability is  limited to the amount invested This does not mean that corporations   themselves have limited liability  The corporation is fully liable ( i.e.  all if its  assets are fully at risk) 
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Limited Liability (con’t) Bondholders also have limited liability.  In fact  most forms of investment  have  limited liability: Limited partnerships Debt investors University trustees  Term “LTD” means limited liability 
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Limited Liability (con’t) So LL is  not  the key distinguishing  characteristic of the corporation Key is the  tradability of residual claims which results in bifurcation of risk- bearing and management (or  “separation of ownership and control”)
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Limited Liability (con’t) Benefits of LL: 1. LL encourages full diversification by  investors 
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This document was uploaded on 10/26/2011 for the course PAM 3340 at Cornell University (Engineering School).

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PAM_334_Fall_2008_Lecture_7 - PAM3340 Lecture7...

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