Re: Corporate liability (WAS: Environmentalism in a Free society)

Peter C. McCluskey (pcm@rahul.net)
Wed, 20 Jan 1999 08:58:43 -0800

GBurch1@aol.com (GBurch1@aol.com) writes:
>In a message dated 99-01-09 22:23:35 EST, Peter C. McCluskey wrote:
>
>> No, you would be perfectly comfortable with equity investments in such a
>> legal system [in which shareholders are liable along with the corporation
>> in which they hold shares], because you could achieve virtually the same
>> risks and rewards
>> as under the current system simply by buying equities and simultaneously
>> buying
>> the corresponding put options with a strike price of zero.
>
>How does this do more than protect your investment in the shares? That's
>already at risk in the current system, since your equity can be wiped out if
>the corporation does something really stupid. Without limited liability,
>ownership of corporate shares would expose my entire net worth. Or am I
>missing something?

As the value of the shares drops below zero, the value of the puts starts rising at the same rate that the value of the shares drop. This probably depends on my implicit assumption that it will be possible to trade shares whose value is negative. I'm confident that that would be the most efficient way to handle the unlimited liability. I suspect you are assuming that trading stops when the share value drops below zero.

>> In practice, most
>> people would find they could live with the risks even without buying the
>> puts.
>
>I can't speak for most people, but I know it FEELS different to me to invest
>in a general partnership, where I know I have unlimited personal liability . .
>.

And investing in GM feels different from buying an internet startup before the IPO. Buying on margin feels different from buying on a purely cash basis. Selling short feels different from buying. I see a wide range of risks. I doubt you would give much thought to the possibility that buying the S&P 500 would expose you to a risk greater than your investment.

-- 
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