Limited Liability

allows for greater diversification of investment
allows for asset allocation and fragmentation instead of total commitment to one single venture
allows for dealing with riskier ventures responsibly
reduces risks of shareholders
alternative: micro-loans to companies
- interest needs to be paid regardless of profits
dangerous and beneficial for creditors
- easier for creditors to assess the value of their claim
  - only need to assess company itself
  - not credit-worthiness of shareholders
- dangerous if shareholder power comes from single entities
  - parent company in form of a group
  - single shareholder in a small company

ex ante
- overstate the corporate assets when getting a loan
  - protection through Financial Statement
  - Accounting Rules and especially IFRS
  - independent auditors → Auditing
  - professional creditors want forward-looking information (e.g. a Business Plan), not information on past ventures (Accounting Statements of last year)
  - Relationship Banking → more professional creditors
  - Supplier Credit or a public Bond → less professional creditors
ex post
- siphoning-off of assets
  - e.g. paying above market value to parent company
- shift in business strategy → more risk
- take on additional debt

🪴 Maixnor WU