We develop an interpretation of the economics of alternative shareholder liability regimes that challenges the view that limited liability always represents the most efficient form of corporate organization. Unlimited liability will prevail when creditors are willing to compensate shareholders...

This paper presents a real-options model of entrenchment in which a CEO chooses how much effort to put into boosting a firm's productivity and the board and CEO bargain over executive-compensation and investment policies. The surplus that bargaining allocates derives from the reduction in value...