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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).

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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).

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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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BIBLIOGRAPHY

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Bell, George J. 1858. Commentaries on the Laws of Scotland. 6th ed. Edinburgh: T. & T.Clark.

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Checkland, S. G. 1975. Scottish Banking: A History, 1695-1973. Glasgow: Collins.

Chordia, Tarun, Richard Roll, and Avanidhar Subrahmanyam. 2001. Market Liquidity andTrading Activity. Journal of Finance 56: 501-530.

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Collins, Michael. 1989. The Banking Crisis of 1878. Economic History Review 42: 504-527.

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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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Evans, Lewis T., and Neil C. Quigley. 1995. Shareholder Liability Regimes, Principal-AgentRelationships, and Banking Industry Performance. Journal of Law and Economics 38:497-520.

Fleming, James S. 1883. On the Theory and Practice of Banking in Scotland. Journal of theInstitute of Bankers 4: 129-153.

Gregory, T. E. 1936. The Westminster Bank Through a Century. London: Westminster BankLtd..

Grossman, Peter Z. 1995. The Market for Shares of Companies With Unlimited Liability: TheCase of American Express. Journal of Legal Studies 24: 63-85.

Grossman, Richard S. 2001. Double Liability and Bank Risk Taking. Journal of Money, Creditand Banking 33: 143-159.

Halpern, Paul, Trebilcock, Michael, and Turnbull, Stuart. 1980. An Economic Analysis ofLimited Liability in Corporation Law. University of Toronto Law Journal 30: 117-150.

Hall, F. G. 1949. The Bank of Ireland 1783-1946. Dublin: Hodges, Figgis & Co..

Hansmann, Henry, and Kraakman, Reinier. 1991. Toward Unlimited Liability for CorporateTorts. Yale Law Journal 100: 1879-1934.

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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.

Jeffreys, J.B. 1946. The Denomination and Character of Shares, 1855-1885. EconomicHistory Review 16: 45-55.

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Kraakman, Reinier. 1998. Unlimited Shareholder Liability. pp.648-54 in The New PalgraveDictionary of Law and Economics, edited by P. Newman. Macmillan, London, pp.648-654.

Levi, Leone. 1880. The Reconstruction of Joint Stock Banks on the Principle of LimitedLiability. The Bankers’ Magazine 40: 468-79.

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.

Munn, Charles W. 1981. The Scottish Provincial Banking Companies 1747-1864. Edinburgh:John Donald.

Plumptre, C. C. M. 1882. Grant’s Treatise on the Law Relating to Bankers and BankingCompanies. London: Butterworths.

Posner, Richard A. 1976. The Rights of Creditors of Affiliated Corporations. University ofChicago Law Review 43: 499-526.

Treasury Committee on Bank Amalgamations. 1918. Report of the Treasury Committee onBank Amalgamations. London: HMSO.

Thomas, S. E. 1934. The Rise and Growth of Joint Stock Banking. London: Sir Issac Pitmanand Sons.

Thomas, W. A. 1986. The Stock Exchanges of Ireland. Liverpool: Francis Cairns.

Weinstein, Mark I. 2003. Share Price Changes and the Arrival of Limited Liability inCalifornia. Journal of Legal Studies 32: 1-25.

White, Lawrence H. 1995. Free Banking in Britain: Theory, Experience and Debate 1800-1845. 2nd ed. London: Institute of Economic Affairs.

Wilson, A. 1879. Banking Reform: An Essay on the Prominent Dangers and the RemediesThey Demand. London: Longmans, Green and Co..

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

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300

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1815

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1837

1839

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1843

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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

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1815

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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

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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

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6

7

8

9

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Vol

ume

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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.

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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.

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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.