Post on 10-Mar-2020
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XIV International Economic History Congress, Helsinki 2006DOES LIMITED LIABILITY MATTER?: EVIDENCE FROM
NINETEENTH-CENTURY BRITISH BANKING*
Graeme G. Acheson, Charles R. Hickson and John D. Turner#
Queen's University Belfast
ABSTRACT
The widely-held, but empirically unsubstantiated, view is that the main advantage oflimited liability over extended shareholder liability is that the enforcement costs of thelatter impedes the tradability and liquidity of shares. We use the rich shareholder-liability experience of nineteenth-century British banking to test this standard view.As well as exploring the means by which unlimited liability was enforced, weexamine the impact of liability regimes on the tradability and liquidity of bank stock.Surprisingly, our evidence suggests that liability rules appear to be irrelevant from astock-liquidity perspective.
* Draft for Session 74 of IEHC 2006 (Helsinki). Not to be quoted without authors’ permission. Turneracknowledges financial support provided by the trustees of the Houblon-Norman Fund and a BritishAcademy grant (SG-36598). We are indebted to Edwin Green for his advice and encouragement at thebeginning of this project. The access to archive material at Barclays, Lloyds-TSB, HBOS, Royal Bankof Scotland Group and HSBC was very much appreciated. Thanks to all the archivists who havelooked after us: Jessie Campbell, Edwin Green, Seonaid McDonald, Rosemary Moore, HelenRedmond, Ruth Reed, Karen Sampson, Reto Tschan, Philip Winterbottom, Lucy Wright, and SianYates.
# Corresponding author: School of Management and Economics, Queen's University of Belfast, Belfast,N. Ireland, BT7 1NN. Email: j.turner@qub.ac.uk
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I. INTRODUCTION
The almost universal privilege of limited liability enjoyed by the modern corporation
is attributed to the fact that this privilege greatly reduces transaction costs to capital
suppliers (Kraakman 1998, p.649; Posner 1976, p.506). It is typically argued that
shares carrying unlimited liability cannot be anonymously traded in public capital
markets (Carr and Mathewson 1988; Winton 1993; Woodward, 1985). Consistently,
Woodward’s (1985) seminal work argues that extensions of liability beyond a firm’s
assets must of necessity impair the transferability of shares. However, Alchian and
Woodward (1987, p.121) go even further by asserting that the alienability of shares
requires limited liability. In a similar vein, Halpern et al (1980) suggest that limited
liability is a necessary precondition for the existence of a market for company stock.
In contrast, our finding is that shareholder liability doesn’t matter from a liquidity
perspective.
The costs of share-transferability impairment could conceivably be larger than
paying contractual (or voluntary) creditors a higher interest rate (Jensen and Meckling
1976, p.331). However, as is well-known, limited liability creates incentives for firms
to take excessive risk because owners do not incur the full cost; instead the risk is
largely borne by tort (or involuntary) creditors. As a consequence, recent legal
scholarship has suggested that firms should have pro rata unlimited liability for tort
damages (Hansmann and Kraakman 1991). Whilst these legal scholars, in
contradistinction to Woodard (1985) and others, believe that such liability extensions
would not impair the marketability of shares, they also admit that there is a lack of
evidence on the past experiences with unlimited liability “to assess how difficult it
was to administer or what its practical incentive effects were relative to those of
limited liability” (Hansmann and Kraakman 1991, p.1925). To the best of our
knowledge, the only empirical studies testing whether liability affects share
transferability have been case studies of two firms (Grossman 1995; Hickson et al
2005).1 Eschewing the case study approach, in this paper, we present abundant
evidence from nineteenth-century Britain which suggests that share alienability and
liquidity are not affected by shareholder liability.
1 Grossman (1995), in his case study of American Express, a firm which had pro rata unlimitedliability, makes an attempt to assess whether this firm’s liability status had an impact on themarketability of its shares. Hickson et al (2005) examine the trading of shares in an nineteenth-centuryIrish banking company before and after its conversion from joint and several unlimited to limitedliability. These two case studies conclude, in stark contrast to the Woodward (1985) hypothesis, thatlimited liability is not a prerequisite for a liquid share market.
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Historical experiences with unlimited liability for corporations in the U.S. are
few and far between. Although unlimited liability corporations existed for a few
decades after the Constitution was adopted, individual states began to grant
corporations the privilege of limited liability (Livermore 1935).2 By way of contrast,
Britain’s rich historical experience with different types of liability regimes makes it
more suitable for testing the impact of liability regimes on share marketability
(Winton 1993, p.504).3 Banking, of all business sectors in Britain, had the richest
and longest experience with extended liability regimes. As we highlight below, in the
nineteenth century there co-existed joint and several unlimited banks and pure limited
liability banks. In addition, in the late-1870s / early-1880s the vast majority of
Britain’s joint and several unlimited liability banks limited their liability to a
predetermined multiple of paid-up capital. Several banks maintained this form of
extended shareholder liability into the twentieth century.
In this paper, we examine the market for bank shares in nineteenth-century
Britain to ascertain the impact of shareholder liability on the transferability of shares.
Not only do we examine how extended liability was enforced, but using share price
data and extensive trading data gathered from individual bank archives, we compare
the tradability and liquidity of unlimited and limited shares. Furthermore, we also
analyse the impact of limiting liability on the market for individual bank shares. Our
main finding is that liability is irrelevant from a liquidity perspective.
The paper proceeds as follows. The next section provides an overview of the
shareholder liability regimes which existed in nineteenth-century British banking.
Using archival evidence, section three examines how extended liability regimes were
enforced in British banking. Section four analyses the impact of liability regime on
ownership concentration. In section five, using archival trading data and share price
data, we examine whether stock liquidity differed between limited and unlimited
2 Extended liability, in the form of double liability, existed for nationally-chartered banks until the1930s (Grossman 2001; Macey and Miller 1992), and, as recently highlighted by Weinstein (2003),until 1929, all California corporations were required to have pro rata unlimited liability.3 Unlimited liability corporations were common in Britain as the privilege of limited liability was notgenerally available to all firms until 1855. However, Anderson and Tollison claim that unincorporatedfirms during the eighteenth and nineteenth centuries used the law of trust to contract around unlimitedliability. See Gary Anderson & Robert Tollison, The Myth of the Corporation as a Creation of theState, 3 Int’l Rev. L. & Econ. (1983). However, Harris states “through the industrious work ofimaginative lawyers and businessmen, the unincorporated company was able to advance beyond theorganizational characteristics of the closed partnership, and to gain some ability to handle transferablejoint stock. But it could not offer most of the features inherent in the joint-stock business corporation:separate legal entity, transferability of interest, and limitation of liability.” See Ron Harris,Industrializing English Law: Entrepreneurship and Business Organization, 167 (2000).
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liability banks. We also analyse the impact upon liquidity of the move from unlimited
to limited shareholder liability. The final section is a brief conclusion.
II. THE VARIETY OF LIABILITY REGIMES IN BRITISH BANKING
From the beginning of the eighteenth century until 1826, the Bank of England was the
only bank in England which was permitted the dual privileges of incorporation and
limited liability; other banks were restricted to the partnership organisational form,
and note-issuing banks were not permitted to have more than six partners. Following
the financial crisis of 1825, which was largely attributed to weak state of the
partnership banks (Thomas 1934, p.58), the Banking Copartnerships Act (1826) was
enacted by Parliament.4 Despite a suggestion from Clay (1837), a Parliamentarian, to
introduce limited liability, bank owners remained subject to joint and several
unlimited liability. A provision within this Act restricted note-issuing banks from
establishing inside a sixty-five mile radius around London. Subsequent legal doubts
with regard to the establishment of non-issuing joint-stock banks within this radius
were removed by legislation in 1833.5
In 1783 the Bank of Ireland was chartered as a limited-liability banking
company. As in England, other banks were restricted to the partnership organisational
form, and note-issuing banks could have no more than six partners. During the Irish
depression of 1819/20, sixteen of the thirty-one partnership banks in Ireland collapsed
(see Hall 1949, pp.127-33 and Barrow 1975, Appendix 2). Consequently, following
the petitioning of Parliament by Irish businessmen, the Irish Banking Copartnership
Regulation Act was passed in 1825, which permitted banks to incorporate as joint-
stock companies. The liability of owners, however, was jointly and severally
unlimited.
Unlike the other two kingdoms, Scotland had three state-chartered limited
liability banks by the middle of the eighteenth century, and the six-partnership
restriction did not apply to Scotland. Furthermore, as the Scottish commercial law
system more closely resembled those of its civil-law continental trading partners
(Brown 1903, p.5; Christie 1909, p.129), Scottish partnership banks had the privilege
4 7 Geo. IV, c.46.5 Bank of England Privileges Act (3 & 4 Will. 4, c.98).
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of having a separate legal personality (Campbell 1967, p.143; Clark 1864, p.2). A
separate legal personality allowed these banks to separate ownership from control, to
the extent that they were able to develop a managerial hierarchy, which in turn
facilitated transferable stock. Consequently, these Scottish partnership banks were
effectively quasi-joint-stock companies with unlimited liability. The provincial banks
formed on this basis in Scotland in the eighteenth and early nineteenth centuries were
all relatively small concerns, with a small branch network (Munn 1981). However,
the establishment of the Commercial Bank of Scotland in 1810 began the era of
nationally-branched joint-stock banking in Scotland. It was followed by the National
Bank and Aberdeen Town and Country Bank, which both commenced in 1825.
Although these banks still had unlimited liability, they were significantly larger than
the provincial banks in terms of owners and number of branches. Uncertainty
regarding the legality of these concerns was cleared up under legislation passed in
1826 (Munn 1981, p.85).6 This Act confirmed their legal status as joint-stock
companies with unlimited shareholder liability (Fleming 1883, p.133).
As can be seen from Table 1, there were 141 unlimited liability joint-stock
banks in Britain in 1849. Although banks had unlimited shareholder liability, the
joint-stock banking legislation permitted banks to issue transferable shares (Plumptre
1882, p.431). From the 1830s, organised exchanges increasingly acted as
intermediaries for traders in bank stock (Killick and Thomas 1970; Thomas 1986).
By 1869, according to the Investors’ Monthly Manual, the stock of 56 British
unlimited liability joint-stock banks traded on stock exchanges. A further 18 English
banks which are listed in the Investors’ Monthly Manual and 15 English banks which
are not listed do not appear to have been actively traded on any exchange. These
banks were typically small or were located in regions which did not have a stock
exchange. Nevertheless, informal markets were organized by stockbrokers operating
in these regions (Killick and Thomas 1970, p.102).
INSERT TABLE 1
In the 1850s, there was a push for limited liability to be freely available to all
firms. Although banks were initially excluded from the provisions of the Joint Stock
Companies Act (1856)7, which granted businesses the freedom to adopt limited
liability, banks were permitted to adopt limited liability after the passage of legislation
6 7 Geo. IV, c.67.7 19 & 20 Vict. c.47.
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in 1857 and 1858.8 From Table 1, we can see that by 1869, there were 41 limited
liability banks in England, one in Ireland and none in Scotland. Notably, only seven
of the English limited banks in 1869 had converted from unlimited liability,
suggesting a reluctance on the part of the established unlimited banks to shift to
limited liability. This reluctance is usually attributed to banks and their depositors
viewing unlimited liability as providing superior depositor protection (Wilson 1879,
p.69). Consequently, they would have suffered the cost of incurring a higher risk
premium by converting to limited liability.
The forty-one limited English banks which had established by 1869 (see Table
1) typically had an uncalled margin on their shares, which it could be argued may
have made the limited banks “practically as safe as an unlimited bank” (Dun 1876,
p.28). Using data from Dun’s (1876) statistical study of banking, we can analyse the
extent to which uncalled capital was used. Of the 40 English limited liability banks
reported in Dun, uncalled capital ranges from multiples of zero to 10 times paid-up
capital. The average and median multiple of uncalled capital are 3.74 and 3.33
respectively, with a standard deviation of 2.02. This raises the question as to whether
there much difference between the limited and unlimited banks. From the viewpoint
of the depositor there may have been less security as the average and median
percentage of uncalled capital to liabilities to the public for the 33 limited banks for
which data exists are 64.8 and 50.6 respectively with a standard deviation of 37.6.
Also, from the shareholders’ viewpoint, there would have been a substantial
difference as the unlimited bank shareholders were liable for all liabilities not a
percentage substantially less than 100 percent. Furthermore, the difference in liability
regimes was substantial for wealthy shareholders because with limited liability their
entire wealth was not in jeopardy in the event that co-owners were unable to make
good their pro rata share of deficiencies between assets and liabilities.
Uncalled capital was a common feature of post-1856 limited liability firms,
but it had almost disappeared by the 1880s (Jeffreys 1946). However, this was not the
case for banks, as of the 28 English limited banks in Dun’s study and still operating in
1889, 21 had the exact same uncalled capital multiple, whilst the other seven had
changed their multiple ever so slightly.9
8 20 & 21 Vict. c.49; 21 & 22 Vict. c.91.9 Figures calculated from data contained in Banking Almanac and Yearbook, 1889.
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As can be seen from Table 1, the unlimited liability joint-stock banks had
virtually disappeared by 1889, morphing into what we have termed ‘reserve liability
joint-stock banks’. The standard explanation for this change, which mostly occurred
in the period 1879-1883, is that the failure of a large Scottish unlimited liability bank,
the City of Glasgow Bank, in October 1878, and the subsequent bankruptcy of 1,565
of its 1,819 shareholders undermined confidence in the unlimited liability joint-stock
bank (Checkland 1975, p.471; Evans and Quigley 1995, p.507; White 1995, pp.50-1;
Collins 1989). Consequently, Parliament rapidly enacted the Companies Act (1879)10
to aid the conversion to limited liability of the established joint-stock banks (Crick
and Wadsworth 1936, p.33; Gregory 1936, vol. 1, p.206). The main innovation of
this Act was the creation of ‘reserve liability’. Unlike uncalled capital, which was
callable at directors’ discretion, reserve liability could only be called in the event of
bankruptcy (Levi 1880). Subsequently, the unlimited liability banks quickly limited
their liability, and voluntarily adopted reserve liability so as to provide resources
beyond the bank for the protection of depositors. In 1884, the average and median
reserve liability as a multiple of paid-up capital were both 3.00, with a standard
deviation of 1.62.11 The obvious question to ask is whether this was an economically
meaningful change. To address this question, the percentage of reserve capital to
liabilities to the public for 18 of the largest British banks was calculated, using data
from Dick (1884). The average and median percentage of liabilities covered by
reserve liability is 31.5 and 33.2 respectively. In other words, whereas unlimited
liability implied that all public liabilities were covered, only one-third of liabilities
were covered by reserve liability.
From the late nineteenth century onwards, the numerous bank amalgamations
typically resulted in the writing-down of reserve liability and uncalled capital.12
Then after 1918, banks rapidly extinguished all uncalled liability on bank shares. The
usual explanation as to why banks were able to do this is that they had become larger
and better diversified, making them more stable. In 1937, only six relatively small
British banks still had reserve liability, with the Deputy Governor of the Bank of
10 42 & 43 Vict., c.76.11 Figures calculated from data contained in Banking Almanac and Yearbook, 1885.12 Treasury Committee on Bank Amalgamations (1918, p.5).
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England being sceptical as to its value, arguing that it was hangover from a different
era.13
III. ENFORCING EXTENDED LIABILITY
If shares are freely transferable, extended liability would degenerate to become de
facto limited as shares are gradually transferred to the impecunious (Woodward
1985, p.602). Economists have hypothesised two mechanisms through which
extended liability may be enforced. Firstly, each incumbent owner could engage in
costly verification of applicant owners and regular monitoring of existing co-owners
to ensure that each had wealth to meet their contribution in the event of bankruptcy
(Jensen and Meckling 1976, p.331; Carr and Mathewson 1988, p.769; Winton 1993,
p.490). Verification and monitoring costs could be reduced by restricting share
transfers to a pool of individuals with a minimum level of wealth (Carr and
Mathewson 1988, p.769; Woodward 1985, p.605). Secondly, owners could be held
legally liable for a “suitable” period of time for any pro rata short-fall in assets
required to cover liabilities in the eventuality of bankruptcy (Woodward 1985, p.606;
Winton 1993, p.500). This legal requirement is necessary to prevent any collective
dumping by owners through sales of shares to impecunious buyers. There is a
problem in determining a suitable period of time; this is particularly so as existing
owners during boom years would have greater propensity to sell to substantially less
wealthy buyers as this is when it is most likely that any sale to an impecunious buyer
could generate an expected net wealth gain. Thus, at first glance, the optimal period
of extended liability may appear difficult to determine, especially as business cycles
prove to be random events. However, such a difficult determination is not difficult to
make because any dilution of co-owner average wealth would be reflected in a
corresponding risk premium, which would be borne by remaining owners.
Consequently, existing owners would, in non-distressed periods, have an incentive to
vet any sales to less wealthy buyers, and the problem of share-dumping would only
arise during periods of financial distress.
Using archival data, we examine the policies used by British unlimited
liability banks to ensure that liability wasn’t de facto limited. The existence of
13 Bank of England Archives (BoE hereafter) C48/61 – Capital of the Bank of Scotland - secret memodated 27/10/1937. The six banks were Martins, William Deacons, District, National, Bank of Scotlandand Commercial Bank of Scotland.
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credible policies were particularly important for historical depository institutions as
extended liability played important depositor-protection and confidence-generating
roles (Evans and Quigley 1995; Grossman 2001; Hickson and Turner 2003a, 2004;
Macey and Miller 1992). Table 2 is based upon a large and representative sample of
bank deeds or contracts of copartnership, which effectively were banks’ founding
constitutions. All of the banks in Table 2 permitted shareholders to transfer or trade
their shares provided that the prior approbation of the board of directors had been
received, which is consistent with directors vetting all candidate owners in order to
exclude low-wealth individuals from ownership.14 Directors of these banks had
adequate incentives to vet circumspectly because they were typically amongst the
wealthiest owners, and as liability was joint and several, they had the largest
incentives of any owners to exclude low-wealth individuals from membership
(Hickson and Turner 2003a, p.952). Notably, this policy isn’t a monitoring solution
with co-owners monitoring one another and verifying each candidate owner. It is
simply a control mechanism operated by the managers of the banks.
INSERT TABLE 2
Apart from the records of the Sheffield and Rotherham Bank, banks don’t
appear to have recorded instances when a transfer was refused by directors. The
directors’ minutes of this bank report ten refusals of transfer in the period 1848-77,
and a note beside one of these refusals states that the transfer was refused due to “the
purchaser’s circumstances not being satisfactory”.15
As can be seen from Table 2, ten banks had clauses in their deeds, which
committed bank directors, if requested by the seller, to purchase shares when they had
refused to authorise a transfer. These clauses typically stipulated that the price to be
paid for such shares was to be equal to the average market price of the last ten
transfers.16 These provisions may have existed to assure shareholders that they could
exit their investment in the bank if they were unhappy with the bank’s governance or
14 Interestingly, the Huddersfield Banking Company and the Lancaster Banking Company gave theirdirectors a pre-emption on all sales at the agreed price, giving them a large degree of control over themake-up of the shareholding constituency.15 RBS Archives: Sheffield and Rotherham Directors’ Minute Book (SR/1/2), Feb. 1851.16 The exceptions to this are as follows. The deed of the Leeds & West Riding Bank clause 61 statedthat the board would buy the shares as the offer price. The Carlisle & City District’s deed clause 57stated that the price to be paid should be equal to the average of the previous three transfers. TheLeicestershire Banking Company’s deed clause 56 states that the at the bank’s AGM, a conventionalprice would be fixed by a vote. This price had to be 10 per cent below the estimate bona fide realvalue. The Bank of Whitehaven’s deeds clause 57 stated that the price to be paid should be equal to theaverage of the previous five transfers.
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if they simply needed to liquidate their capital. However, the majority of banks
sampled did not have such provisions. Nevertheless, as can be seen from Table 2,
bank deeds typically permitted directors to buy and sell shares on behalf of the bank.
Although such an activity is regarded with suspicion in contemporary financial
markets, it may have served a useful purpose in the development of early capital
markets by effectively permitting shareholders to exit their investment on demand,
making bank shares more attractive to investors.17 In Table 2 there are six banks
which neither permitted directors to buy and sell shares nor had provisions for buying
shares if transfers were refused. Notably, four of these banks were based in large
metropolitan areas where one would expect more active and liquid security markets in
the first instance.
The limited liability banks which established after 1858 don’t appear to have
required director vetting of share transfers even though the majority of them had
uncalled capital. However, when the unlimited banks eventually limited their
liability, it did not result in changes to bank deeds with respect to the vetting of share
transfers by directors (Withers and Palgrave 1910, p.93). Such vetting was still
required because banks had reserve liability. George Rae (1885, p.233), the banking
expert, noted that:
Directors have the power to make this [shareholders that have adequate wealth
to meet all calls] an indispensable condition of proprietorship: they are
empowered by your Deed of Settlement to reject, as a shareholder, anyone of
whom they do not approve……if it is not exercised, portions of the stock may
gradually drift into the hands of persons of insufficient substance.
Nevertheless, given that reserve liability was a pro rata extended liability regime,
there were substantially reduced incentives for bank directors to vet share transfers
than there was under unlimited liability, as the admission of low-wealth shareholders
into the bank imposed near-zero externalities on other owners (Hickson et al 2005).
As well as the self-imposed director vetting of share transfers, the legal system
held owners liable for a period of time after they had sold their ownership stake. The
Irish Banking Copartnerships Act (1825) and English Banking Copartnerships Act
17 Interestingly, City Bank, which was one of the last unlimited liability joint-stock banks to establish,explicitly stated that the Bank would not buy its own shares, suggesting that the liquidity of the marketfor bank stock may have increased significantly by 1855.
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(1826) both imposed a post-sale-extended liability on shareholders of unlimited
liability joint-stock banks. This provision made shareholders liable for the bank’s
debts for three years after they had sold their shares. In Scotland, previous owners of
unlimited liability joint-stock shares were held liable for debts incurred during their
tenure if existing partners were unable to cover these losses from their own personal
assets (Bell 1858, p.224).
Established English, Irish and Scottish banks which registered as unlimited
liability companies under the Companies Act (1862) were able to reduce their post-
sale-extended-liability requirement to one year. Notably, the 1862 Companies Act,
also made shareholders liable for all unpaid capital for up to one year after they
ceased to be an owner (Plumptre 1882, p.507). In other words, shareholders of
limited liability banks with uncalled or reserve liability also faced a post-sale-
extended liability requirement.
As argued above, the function of this post-sale-extended liability requirement
was simply to discourage opportunistic dumping of shares by wealthy owners during
times of financial distress in order to escape potential calls. In effect, it could be
viewed as preventing the director-vetting mechanism breaking down in the last
period. Consequently, it is unlikely to have affected the tradability or liquidity of
bank shares.
Unlimited liability was enforced by director vetting and a legally-imposed
post-sale-extended liability requirement. When these banks limited their liability,
they adopted reserve liability and it appears that directors were still required to vet
share transfers. However, the fact that liability was no longer joint and several, and
that potential calls on shareholders were dramatically reduced, would have
encouraged directors to vet less carefully. Furthermore, the limitation of liability
dramatically reduces the incentives of wealthy owners to actively participate in the
management of the bank, with the result that the professional manager arises, who
would have few incentives to conduct the vetting role circumspectly (Acheson and
Turner 2006).
IV. OWNERSHIP CONCENTRATION
The standard view is that unlimited liability results in concentrated ownership as the
costs of monitoring co-owners’ wealth increases substantially with each additional
owner (Grossman 1995, p.69). It is therefore notable that many of the joint-stock
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banks in Table 2 restricted the maximum number of shares which any one shareholder
could own, and, in all cases, this was a low proportion of the bank’s stock.
Significantly, several of the larger banks in Table 2 did not have such provisions,
possibly because the attraction of holding a large block in these banks might have
been reduced by the low upper limit on the number of votes any one shareholder was
entitled to cast at shareholder meetings. For example, the upper limit on votes for the
largest English banks were as follows: Union Bank of London (20); National
Provincial Bank of England (4); London and Westminster Bank (4); London Joint
Stock Bank (20); Wilts and Dorset (5). Alternatively, ownership restrictions may not
have been necessary as many of these banks operated in or near large metropolitan
centres, and as a consequence would have had greater access to capital and less of a
thin trading problem.
There are several possibilities as to why unlimited banks placed restrictions on
ownership concentration. Firstly, due to the existence of unlimited liability, bank
depositors and note-holders may have preferred to see the shares of the bank
dispersed amongst many owners because there is less risk that many owners would
become bankrupt as compared to a few owners (Hickson and Turner 2005).
Secondly, the existence of a block-holder, particularly one whose holding constituted
a large part of his overall wealth, might discourage other individuals from investing,
as such an owner could use their dominance to expropriate minority shareholders by
lending at below-market rates to themselves, family members or friends. Thirdly, the
existence of these limits on ownership concentration may have been to stimulate a
thicker market for bank stock (Anderson and Cottrell 1975, p.599).
As there are few surviving records which enables us to measure the dispersion
of ownership, we must rely on the number of owners as a proxy for ownership
concentration – the greater the number of owners, the more diffuse the ownership.
Table 3 contains ownership data for the British banking system in 1875, which allows
us to compare limited with unlimited banks.
INSERT TABLE 3
The somewhat surprising finding, from the viewpoint of accepted theory,
which emerges from Table 3 is that unlimited banks had, on average, more diffuse
ownership than limited liability banks. Furthermore, several unlimited banks had
significantly more owners than their limited liability counterparts: the largest limited
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liability bank, in terms of owners, had 1,650 shareholders, whereas 8 unlimited banks
had more than this, with three having at least double this amount.
It could be argued that the relative youth of the English limited banks accounts
for the above findings. However, in the case of Scotland, the three limited banks were
64 to 114 years older than their unlimited liability joint-stock rivals, and, as can be
seen from Table 3, there is little difference in the average number of owners between
the Scottish limited and unlimited banks, with one unlimited bank having more
shareholders than any of the limited banks.
V. IMPACT OF LIABILITY ON TRADABILITY AND LIQUIDITY
A. Empirical Strategy
As was noted above, limited and unlimited liability banks coexisted in the nineteenth
century, enabling us to analyse the impact of shareholder liability on the tradability
and liquidity of shares. In addition, nearly all unlimited banks limited their liability in
the early 1880s, which permits us to test whether or not this had an effect on the
tradability and liquidity of shares.
The usual method of measuring tradability of shares is to use the number of
shares trades and volume of trade (Chordia et al 2001). The only source of such data
for nineteenth-century banks are individual bank archives. However, surviving
records of share trading are uncommon. Following an extensive search of British
bank archives, we obtained trading data for nine unlimited banks in the period before
and after they converted to limited liability. Also, long-term share trading data was
obtained for the Royal Bank of Scotland (a Scottish limited bank) and three Scottish
unlimited banks, enabling us to compare contemporaneous trading levels for limited
and unlimited banks.
As no bid-ask spreads exist for this period, several alternative metrics are used
to proxy liquidity. Firstly, the absolute average annual price changes between trades
is used because an important aspect of liquidity is the extent to which large price
changes between trades is absent (Bhide 1993, p.33). Unfortunately, there only exists
a complete set of price data for four banks. Secondly, the number of trades divided by
the number of issued shares and volume of trade divided by the number of issued
shares are used as proxy measures of liquidity. These metrics measure the turnover
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of issued shares, and are frequently used as a measure of liquidity in inter-market
comparisons (Han 1995, p.164; Levine and Zervos 1998, p.538; Ogden et al 2003,
p.109). The number of issued shares is adjusted for new issues and stock splits.
As well as archival data on share trading for several banks, we also have
monthly share price data for nearly all British banks for the last quarter of the
nineteenth century. This data was obtained from the Investors’ Monthly Manual
(IMM). Using this data, we can measure the stickiness of share prices by counting
the number of months in which share prices don’t change from the previous month.
This measure is a proxy for liquidity as the share prices typically hadn’t changed
because no trades had occurred.
B. The Market for Scottish Bank Shares
As can be seen from Table 4, we have trading data for one of the largest and one of
the smallest unlimited Scottish banks, as well as one of the limited liability banks.
The stock registers of the Caledonian Banking Company and the Central Bank of
Scotland contain a chronological record of each share transfer for 1846-92 and 1835-
68, respectively.18 The directors’ minute books of the Commercial Bank of Scotland
contain trading data for the period 1815-81.19 Share trading data was obtained from
the Royal Bank of Scotland’s transfer books for 1817-61.20 Unfortunately, the
absence of post-1861 share trading records for this bank limits us to comparing the
market for Scottish bank shares prior to this date. The trading data for these four
banks excludes all gratuitous transfers of shares – transfers which would have taken
place due to shares bequeathed in wills or inter vivos gifts.
INSERT TABLE 4
From Figure 1, we observe that apart from 1860, the number of trades in the
Royal Bank of Scotland exceeded those of other banks. Also, as we can see from
Figure 2, the volume of Royal Bank shares traded is greater than all other banks apart
from the Caledonian Bank. However, as can be seen from Table 4, the Caledonian
had a substantially lower amount of paid-up capital per share compared to the Royal
Bank, explaining why more Caledonian shares were traded.
INSERT FIGURES 1,2,3&4
18 HBOS Archives: Caledonian Banking Company, Transfer Books (945/1/429/79-84); Central Bank ofScotland, Stock Journal (945/8/4/1).19 RBS Archives: Commercial Bank of Scotland, Board Minute Books (CS/13/1 to CS/13/10).20 RBS Archives: Royal Bank of Scotland, Transfer Books (RB/402/1 – RB202/16).
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The greater tradability of Royal Bank shares can be explained by the size of
this bank in terms of capital and number of owners (see Table 4). However, as can be
observed from Figures 3 and 4, despite this size advantage, the shares of the Royal
Bank were no more liquid than those of the Commercial Bank prior to 1835. Indeed,
after 1845, the shares of the small Central Bank of Scotland and the shares of the
Commercial Bank appear to be more liquid than those of the Royal Bank. Using the
volume-of-trade liquidity measure, the Royal Bank has the least liquid shares post-
1845. Despite its size advantage and, more importantly, its limited liability, the
shares of this bank appear to be no more liquid than those of the unlimited liability
Scottish banks, giving weight to the view that liability doesn’t matter from a liquidity
perspective.
C. Impact of Limiting Liability on Tradability and Liquidity
Table 5 contains details of the banks for which we have share trading data before and
after they moved to limited liability. As can be seen from this Table, most of the
banks limited their liability in the early 1880s, following the fallout from the City of
Glasgow crash. However, one bank in Table 5 moved before this period, and another
bank didn’t convert until 1889. Notably, all banks in Table 5, apart from one, adopted
reserve liability. The banks include some of the largest British banks at the time and
also some of the smallest. In order to limit the influence of other factors on liquidity,
we examine the tradability and liquidity of bank shares in the five years before and
after each bank limited its liability.
INSERT TABLE 5
Trading data was pieced together from a wide variety of archival sources,
including stock registers and journals (Ashton, Stalybridge, Hyde & Glossop;
Caledonian Banking Co.; Huddersfield Banking Co.)21, shareholders’ registers
(Sheffield and Hallamshire)22, directors’ minutes (County of Stafford Bank;
Leicestershire Banking Co.; Union Bank of London; Ulster Banking Co.)23, and share
21 RBS Archives: Ashton, Stalybridge, Hyde & Glossop Bank, Stock Register (ASH/1); HBOSArchives: Caledonian Banking Company, Transfer Books (945/1/429/79-84); HSBC Archives:Huddersfield Banking Company, Stock Journal (H23).22 HSBC Archives: Sheffield and Hallamshire Share Registers (598/2).23 RBS Archives: County of Stafford Bank, Minutes of the Directors (CST/4/1, CST/4/2, CST/25/1,CST/25/2); HSBC Archives: Leicestershire Banking Company, Minutes of Directors (K15 to K23).RBS Archives: Union Bank of London, Directors’ Minute Books (UNI/1/1 to UNI/1/49); PRONI:Ulster Banking Company’s Committee and General Meeting Minute Books (D/3499/AA/3-4).
Session 74 IEHC
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transfer books (Sheffield and Rotherham).24 The records of the County of Stafford
Bank and Union Bank of London do not enable us to distinguish between share sales
and gratuitous assignments of shares. Although this results in an overestimation of
the trading activity and liquidity of shares in these banks, it should not be affected by
a limitation of liability as gratuitous assignments were usually bequests from a
deceased shareholder to their beneficiaries or inter vivos gifts between family
members.
From the tradability measures in Table 6, we can see that trading activity only
increased substantially for three banks after their liability was limited – Leicestershire
Banking Co., Sheffield and Rotherham, and Ulster Banking Co.. Notably, these are
the only three banks in Table 5 which adjusted their share issue when they limited
their liability: the Leicestershire Banking Co. had a 1-for-5 stock split in 1879;
Sheffield and Rotherham had a 1-for-4 split in 1880; the Ulster Banking Co. issued
40,000 shares in 1882.
INSERT TABLE 6
The two liquidity measures which are reported for all banks in Table 6 reveal
that the liquidity of bank shares decreased after the limitation of liability. The
average-absolute-change-in-prices-between-trades liquidity measure in Table 6 shows
that for two banks, liquidity of their shares decreased after liability was limited, and
that the liquidity of Sheffield and Rotherham Bank shares increased slightly.
However, this improvement may be attributed to the liquidity-enhancing effects of the
bank’s stock split in 1880.25
Overall, the evidence in Table 6 suggests that liquidity and tradability didn’t
change or declined after liability was limited. This is somewhat paradoxical as the
standard view is that liquidity should increase substantially following a limitation of
liability. The fact that liquidity doesn’t change or decreases across countries and
different types and sizes of banks rules out these factors as explanatory variables for
our findings. Furthermore, as banks converted to limited liability at different times
(see Table 5), ranging from 1873 to 1889, overall market conditions may also be ruled
out as an explanatory factor.
24 RBS Archives: Sheffield and Rotherham Bank, Bank Shares Transfer Book, 1861 – May 1885(SR28/1) and May 1885 – June 1900 (SR28/2).25 Stock splits are usually associated with a desire to increase the liquidity of an issue (Copeland 1979,p.115).
Session 74 IEHC
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Another possible explanation for our findings is that little had changed in that
banks had reserve liability, with directors still vetting share trades. Leaving aside the
substantially reduced incentives of directors to exclude low-wealth individuals and the
substantially reduced downside risk for shareholders due to liability becoming limited
and pro rata, as can be seen in Table 5, one bank in our sample (Sheffield and
Hallamshire Bank) didn’t have reserve liability after its shareholder liability was
limited. As we can observe from Table 6, its conversion to limited liability had little
or even a negative impact (depending on which measure is used) on the liquidity of its
stock.
D. The Stickiness of Share Prices
The Investors’ Monthly Manual was a monthly publication, which began in the mid-
1860s and reported the most recent share prices of the majority of British banks. If no
trades took place in a particular month, either the previous month’s share price or no
share price was reported. Consequently, we can use this information to measure the
stickiness of bank share prices. We obtained monthly prices for 85 British banks for
the period 1868 to 1877; this is the decade just before the City of Glasgow crisis and
the general move to limited liability.
Table 7 compares the stickiness of share prices for limited and unlimited
banks in Scotland, Ireland and England. We also sub-divide the English banks into
London-based banks and provincial banks as the banks in these two sectors differed in
the types of business in which they engaged, and London-based banks had greater
access to active capital markets.
INSERT TABLE 7
As can be observed from Table 7, the share prices of the unlimited Irish banks
were, on average, more sticky than those of the two limited banks. However, the
relatively large size of the Bank of Ireland, in terms of market capitalisation, may
explain most of this finding. Interestingly, two of the unlimited banks (National and
Provincial) had less sticky share prices than the Bank of Ireland.
There is little difference between the limited and unlimited Scottish banks in
terms of the stickiness of their share prices, which is interesting given the larger size
(see Table 7) of the limited banks. As can be seen from Table 7, the unlimited
London-based banks have less sticky share prices than their limited counterparts.
However, the larger size of the unlimited banks may explain this finding. The
Session 74 IEHC
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difference in the means of the limited and unlimited provincial banks is statistically
not different from zero, suggesting that there is little difference in the liquidity of
unlimited and limited liability shares.
Overall, based on our stickiness measure, it appears that the shares of limited
banks were not necessarily more liquid than those of their unlimited rivals. The
comparison of limited and unlimited banks in England is possibly not comparing like
with like in that the limited banks were significantly younger than the more-
established and larger unlimited banks. However, based on our evidence, the
relatively large and long-established limited banks of Ireland and Scotland did not
have more liquid stock than their unlimited counterparts.
One could rationalise our results by suggesting that the uncalled capital of the
English limited banks meant that in effect they were no different from their unlimited
counterparts, and this explains why we find little difference in liquidity. However,
although the three Scottish and one Irish limited bank didn’t have any uncalled
capital, their stock was no more liquid than that of their unlimited rivals.
As well as comparing the stickiness of limited and unlimited stock, our share
price data from the Investors’ Monthly Manual, also enables us to analyse the impact
of limiting liability upon the stickiness of bank stock prices. We use the five years
before and after a bank limited its liability to reduce the likelihood of other factors
affecting the stickiness of stock. As can be observed from Table 8, we have data for
53 banks which limited their liability over the period 1874-1889, with the vast
majority of banks limiting their liability in the early 1880s.
INSERT TABLE 8
As can be seen from Table 8, although the average percentage of months when
stock prices didn’t change fell slightly, the difference in means is not statistically
different from zero. Notably, the stickiness of 41.5 per cent of bank stock actually
increased after liability was limited. This evidence suggests that the impact on stock
liquidity of introducing limited liability was negligible.
VI. CONCLUSION
Most economists and legal scholars believe that if extended liability is to be credible,
enforcement mechanisms are necessary to prevent shares ending up in the hands of
the impecunious. However, they also suggest that such enforcement mechanisms
Session 74 IEHC
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come at a substantial cost – reduced tradability and liquidity. The rich institutional
history of nineteenth-century British banking provides us with a natural experiment,
which permits an analysis of how extended liability regimes are enforced, and
whether such enforcement affects the marketability and liquidity of stock.
From an extensive collection of bank deeds, we find that bank directors vetted
and had to approbate all share transfers, thereby exercising control over the aggregate
quality of the shareholding constituency. The common law and banking legislation,
by imposing a post-sale-extended liability requirement on shareholders, gave this
vetting process credibility in the last period (i.e. when a bank was approaching
financial distress).
The impact of the above enforcement mechanisms on the tradability and
liquidity of shares was tested by comparing the market for limited and unlimited bank
stock, and by examining the impact of shareholder liability regime changes on the
market for bank stock. Our findings suggest that the stock of limited banks was no
more liquid than that of unlimited banks, and that stock didn’t become more liquid
after banks limited their liability. Overall, the different types of evidence presented
above all point to the conclusion that enforcement mechanisms didn’t impinge on the
tradability and liquidity of shares carrying unlimited liability.
Our findings raise the question as to whether extended liability would be
possible in modern financial markets. If nineteenth-century banks with thousands of
shareholders, operating in a nascent and unsophisticated financial environment, were
able to successfully operate under a joint and several unlimited liability regime, why
couldn’t modern publicly-quoted firms with tens of thousands of shareholders operate
under a pro rata extended liability regime?
Our study also throws some new light on the important question as to why
Britain’s legislature overthrew the common-law tradition of unlimited liability in
favour of limited liability as the automatic default regime for companies. Although
Winton (1993, p.505) claims that liquidity enhancement was one of the main
motivations behind the introduction of limited liability legislation in Britain, our
evidence would suggest that limited liability wasn’t necessarily liquidity-enhancing.
This casts a measure of doubt upon why limited liability was adopted by Parliament,
and raises questions which need to be addressed by future research.
Session 74 IEHC
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Copeland, Thomas E. 1979. Liquidity Changes Following Stock Splits. Journal of Finance34: 115-141.
Crick, W. F. and J. E. Wadsworth. 1936. A Hundred Years of Joint Stock Banking. London:Hodder and Stoughton.
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Gregory, T. E. 1936. The Westminster Bank Through a Century. London: Westminster BankLtd..
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Hickson, Charles R., John D. Turner, and Claire McCann. 2005. Much Ado About Nothing:The Introduction of Limited Liability and the Market for Nineteenth-Century Irish BankStock. Explorations in Economic History 42: 459-76.
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Livermore, Shaw. 1935. Unlimited Liability in Early American Corporations. Journal ofPolitical Economy 43: 674-87.
Macey, Jonathan R., and Geoffrey P. Miller. 1992. Double Liability of Bank Shareholders:History and Implications. Wake Forest Law Review 27: 31-62.
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Winton, Andrew. 1993. Limitation of Liability and the Ownership Structure of the Firm.Journal of Finance 48: 487-512.
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Withers, Hartley, and R.H.I. Palgrave. 1910. National Monetary Commission: The EnglishBanking System. Washington: Government Printing Office.
Woodward, Susan. 1985. Limited Liability in the Theory of the Firm. Journal of Institutionaland Theoretical Economics 141: 601-611.
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0
50
100
150
200
250
300
350
400
450
1815
1817
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1825
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1829
1831
1833
1835
1837
1839
1841
1843
1845
1847
1849
1851
1853
1855
1857
1859
1861
Num
ber o
f tra
des
Central Bank of Scotland Caledonian Banking Co. Commercial Banking Co. Royal Bank of Scotland
FIGURE 1ANNUAL NUMBER OF TRADES OF SCOTTISH BANK SHARES, 1815-1861
Session 74 IEHC
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0
500
1000
1500
2000
2500
3000
1815
1817
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1851
1853
1855
1857
1859
1861
Vou
lme
of sh
ares
trad
ed
Central Bank of Scotland Caledonian Banking Co. Commercial Banking Co. Royal Bank of Scotland
FIGURE 2ANNUAL VOLUME OF TRADE IN SCOTTISH BANK SHARES, 1815-1861
Session 74 IEHC
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0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1815
1817
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1861
No.
of t
rade
s / n
o. is
sued
shar
es %
Central Bank of Scotland Caledonian Banking Co. Commercial Banking Co. Royal Bank of Scotland
FIGURE 3ANNUAL LIQUIDITY OF SCOTTISH BANK SHARES, 1815-1861
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0
1
2
3
4
5
6
7
8
9
1815
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Vol
ume
of tr
ade
/ no.
issu
ed s
hare
s %
Central Bank of Scotland Caledonian Banking Co. Commercial Banking Co. Royal Bank of Scotland
FIGURE 4ANNUAL LIQUIDITY OF SCOTTISH BANK SHARES, 1815-1861
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TABLE 1LIABILITY REGIMES IN BRITISH BANKING (1849-1889)
1849 1869 1889
England & WalesLimited liability banks (State-charter) 1 1 1Unlimited liability joint-stock banks 113 73 2Limited liability joint-stock banks - 41 40Reserve liability joint-stock banks - - 62
IrelandLimited liability banks (State-charter) 1 1 1Unlimited liability joint-stock banks 10 7 0Limited liability joint-stock banks - 1 0Reserve liability joint-stock banks - - 8
ScotlandLimited liability banks (State-charter) 3 3 3Unlimited liability joint-stock banks 18 9 0Limited liability joint-stock banks - 0 0Reserve liability joint-stock banks - - 7SOURCES: Banking Almanac and Yearbook, 1850, 1870, 1890.
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TABLE 2SELF-GOVERNANCE OF SHARE TRADING BY NINETEENTH-CENTURY
BRITISH BANKSBank (est.) Director
vetting ofshare
transfers
Directorspermitted tobuy and sell
shares onbehalf of bank
Provisions forbuying shares
if transferrequestrefused
Upper limiton proportion
of sharesowned by an
individual(%)
Purely London banksCity Bank (1855) yes no no 6.66London Joint Stock Bank (1836) yes yes no noneLondon and Westminster (1834) yes yes no noneUnion Bank of London (1839) yes no no none
London and Provincial banksLondon and County (1836) yes yes no 0.75National Provincial Bank (1833) yes yes no none
Provincial banksAshton, Stalybridge, Hyde & Glossop (1836) yes yes no noneBank of Liverpool (1831) yes yes no noneBank of Whitehaven (1837) yes yes yes noneBilston District Banking Company (1836) yes yes no 1.00Birmingham and Midland (1836) yes no no 1.00Birmingham Town & District (1836) yes no no noneBradford Banking Company (1827) yes yes yes 2.86Burton , Uttoxeter & Staffordshire (1840) yes yes no noneCarlisle & Cumberland (1837) yes yes no 1.00Carlisle City & District (1837) yes yes yes 2.00County of Gloucester Bank (1836) yes yes no 2.50Hampshire Banking Company (1834) yes yes no 3.33Herefordshire Banking Company (1836) yes yes yes 2.50Huddersfield Banking Company (1827) yes yes no 4.00Hull Banking Company (1834) yes yes no 1.25Lancaster Banking Company (1826) yes yes no 3.33Leeds and West Riding (1836) yes yes no 0.50Leicestershire Banking Company (1829) yes yes yes 2.00Manchester and Liverpool District (1829) yes yes no noneNorth and South Wales Bank (1836) yes yes no noneRoyal Bank of Liverpool (1836) yes yes no 1.00Sheffield and Hallamshire Bank (1836) yes yes yes 1.00Sheffield and Rotherham (1836) yes yes no noneSheffield Banking Company (1831) yes no no 2.66Stamford & Spalding Banking Co. (1832) yes no no 2.00Stourbridge & Kidderminster (1834) yes yes no 1.00Wilts and Dorset (1835) yes no yes noneYork Union Banking Co. (1833) yes yes yes 1.66Yorkshire Banking Company (1843) yes yes yes noneYorkshire District Bank (1834) yes yes yes none
Scottish banksCentral Bank of Scotland (1834) yes yes no 2.00City of Glasgow Bank (1839) yes yes no noneCommercial Banking Co. (1810) yes yes no noneNational Bank of Scotland (1825) yes yes no noneUnion Bank of Scotland (1830) yes yes no none
Irish banksBelfast Banking Company (1827) yes yes no 2.00Northern Banking Company (1825) yes yes no 2.00National Bank of Ireland (1835) yes yes no noneUlster Banking Company (1836) yes yes no 2.00SOURCES: Deeds and Contracts of Copartnership obtained from Barclays Archives, British Library, HBOSArchives, HSBC Archives, Lloyds-TSB Archives, PRONI, RBS Archives.
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TABLE 3OWNERSHIP CONCENTRATION AND LIABILITY REGIMES IN BRITISH
BANKS (1875)England & Wales Scotland Ireland Overall
Unlimited Limited Unlimited Limited Unlimited Limited Unlimited LimitedNumber of banks 65 41 8 3 7 1 80 45Average number ofowners
559.0 467.6 1,212.9 1,361.7 1,588.0 1163.0 714.5 542.6
Standard deviation 885.3 341.7 280.0 136.3 1158.0 - 925.4 408.3
Maximum 4,800 1,650 1,623 1,468 4,000 - 4,800 1,650Minimum 60 30 801 1,208 648 - 60 30No. > 1,500 owners 7 4 6 3 5 1 18 8No. > 1,000 owners 6 1 1 0 2 0 9 1
SOURCE: Bank reports contained in Dun (1876).
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TABLE 4SCOTTISH BANKS AND SHARE TRADING DATA (1815-61)Bank (est.) Trading
dataavailable
Paid-upcapital(1849)
Branches(1849)
Numberof
owners(1849)
Paid-upper share(1849)
Shareprice
(1844)
£ £ £Unlimited liability banksCaledonian Bank of Scotland (1838) 1846-61 125,000 8 920 2.50 3.50Central Bank of Scotland (1834) 1835-61 56,625 6 400 25.00 n/aCommercial Bank of Scotland (1810) 1815-61 600,000 47 6281 100.00 169.00
Limited liability bankRoyal Bank of Scotland (1727) 1817-61 2,000,000 31 950 100.00 186.00NOTE: 1 This is the 1853 figure.SOURCES: Banking Almanac and Yearbook, 1845 and 1850; The Course of the Exchange, Dec. 1844.
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TABLE 5THE LIMITATION OF LIABILITY AND SHARE TRADING DATA
Trade-by-tradeprice dataavailable
Liabilitylimited
Reserveliability
multiple1
No. owners
1879
Paid-upcapital
(£’000s)
1879English banksAshton, Stalybridge, Hyde & Glossop no 1884 2.50 154 50County of Stafford Bank no 1873 8.96 111 60Huddersfield Banking Co. yes 1882 2.04 339 415Leicestershire Banking Co. yes 1880 1.00 402 300Sheffield and Hallamshire Bank no 1889 0.00 351 210Sheffield and Rotherham Banking Co. yes 1880 3.13 299 161Union Bank of London no 1882 2.85 3,300 1,395
Irish bankUlster Banking Co. no 1883 4.00 1,456 300
Scottish bankCaledonian Bank of Scotland no 1882 3.00 982 150NOTES: 1 This is a multiple of paid-up capital.SOURCES: Banking Almanac and Yearbook, 1880, 1885, 1890.
Session 74 IEHC
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TABLE 6TRADABILITY AND LIQUIDITY OF BANK SHARES IN THE FIVE YEARS BEFORE AND AFTER LIABILITY WAS LIMITED
Tradability measures Liquidity measuresNo. of trades Volume of trade No. of trades / issued
shares (%)Volume of trade / issued
shares (%)Average absolute changein prices between trades
Before After Before After Before After Before After Before AfterEnglish banksAshton, Stalybridge, Hyde & Glossop 123 114 4,724 5,269 0.98 0.91 37.79 42.15 - -County of Stafford Bank 4 0 200 0 0.03 0.00 1.67 0.00 - -Huddersfield Banking Co. 171 178 3,220 3,299 1.01 1.05 18.94 19.41 0.86 1.31Leicestershire Banking Co. 381 473 3,163 7,917 2.54 1.18 21.09 19.79 0.49 0.59Sheffield and Hallamshire Bank 314 355 3,313 2,945 3.14 3.55 33.13 29.45 - -Sheffield and Rotherham Banking Co. 182 274 937 4,345 3.64 1.14 18.74 18.10 0.87 0.76Union Bank of London 5,437 4,826 45,526 36,079 6.04 4.39 50.58 40.09 - -
Irish bankUlster Banking Co. 2,149 2,745 35,717 37,610 1.79 1.72 29.76 23.51 - -
Scottish bankCaledonian Bank of Scotland 579 442 16,765 9,279 1.16 0.74 33.53 15.47 - -NOTES: 1 The trading of Caledonian Banking Co. shares was suspended from Dec. 1878 until June 1879.SOURCES: see text.
Session 74 IEHC
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TABLE 7THE STICKINESS OF BANK SHARE PRICES, 1868-77
% months when share price didn’tchange
Average marketcapitalisation
(£’000s)mean median
English banksLimited (N = 42) 51.04 49.58 426
Unlimited (N = 23) 63.75 71.85 909English provincial banks
Limited (N = 36) 59.17 65.55 401Unlimited (N = 17) 72.22 80.25 448
London-based banksLimited (N = 6) 29.08 22.69 501
Unlimited (N = 5) 12.89 9.66 3,671Irish banks
Limited (N = 2) 18.91 18.91 4,289Unlimited (N = 7) 32.65 17.65 1,225
Scottish banksLimited (N = 3) 30.53 31.09 3,035
Unlimited (N = 8) 29.83 30.67 1,760NOTES: Market capitalisation figure is for January 1872, and was obtained from Investors’ MonthlyManual. The difference in means of the limited and unlimited banks for each system were tested to seeif they were statistically different from zero. We were unable to reject the hypothesis that the meanswere equal at the 5% level of significance apart from for the London-based banks and Irish banks.
Session 74 IEHC
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TABLE 8THE STICKINESS OF BANK SHARE PRICES IN THE FIVE YEARS BEFORE
AND AFTER LIABILITY WAS LIMITEDMedian year in
which bankslimited their
liability
Range of years inwhich bankslimited their
liability
Percentage of months whenshare price didn’t change
(average)
Before After
English banks(N = 39)
1880 1874-89 57.91 53.59
English provincial banks(N = 33)
1880 1874-89 66.41 61.72
London-based banks(N = 6)
1880 1880-82 11.11 8.89
Irish banks(N = 7)
1882 1881-83 21.19 17.38
Scottish banks(N = 7)
1882 1882 25.71 25.00
NOTES: The difference in the means of the before and after periods were tested to see if they werestatistically different from zero. We were unable to reject the hypothesis that the means were equal atthe 5% level of significance.