This article examines two major events in the economic and financial history of the
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and financial crises. The first involves the rise of limited liability in the 1860s
and its subsequent disgrace. The second involves the economic boom of the 1980s, the
stock market crash, and the subsequent recession. It is shown that, while the FIH is
underpinned by a microeconomic model of the financial management of a business, it
does not recognize the differences between the company’s interests and
those of its owners, the conflicts caused, the likelihood of informational asymmetry
and its implications for accounting information. The article shows how in these two
episodes the owners of companies may exploit their limited liability and
informational asymmetry. Because the FIH does not consider these factors, it is
incomplete both as an explanation and as a predictor of financial crises.
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