Multinational enterprise limited liability and cross-border acquisitions

Abstract

In a recent paper on corporate (private) behavior and public policy. John and Senbet (1989) examine the social agency problems induced by the provision of limited liability to equity claimants in a closed-economy. Under corporate limited liability, if the assets of the firm are insufficient to meet the primary obligations to non-capital contributors, such as employees. customers, suppliers, the capital owners are not obliged to use their personal assets to meet the obligations. Thus, equity of the firm (even without financial debt) obeys the characteristic of limited liability with zero exercise price. John and Senbet show, consequently, that an all-equity firm overinvests in risky technologies relative to socially optimal levels of investment, and argue that corporate leverage (with allowance of deductibilit, of interest payments for tax purposes) can align private investment incentives with social optimality.