Bad Apples or Bad Bushel? Ethics, Efficiency and Capital Market Integrity
نویسندگان
چکیده
Popular interpretation of the recent financial scandals describes the individuals and firms charged with wrongdoing as ‘bad apples’ while retaining a sanguine view of the capital markets overall. The system-wide reach of the revealed malfeasance, however, suggests that the root cause of the scandals resides instead in the capital markets’ institutional norms. Specifically, we argue that norms have developed that promulgate the selfenrichment of the intermediaries who facilitate capital transactions at the expense of the principal parties to the transactions. This not only represents an ethical breakdown of the system, but also implies a simultaneous loss of efficiency, since professional integrity is the fundamental value proposition of financial intermediaries. To set the stage, we establish the holistic and systematic interdependence of the capital markets and clarify the broad roles they require. As increasing numbers of business scandals are brought to light, it becomes ever clearer that the ‘problem’ facing the capital markets is pervasive throughout financial intermediaries, shifting the relevant questions from ones of how to deal with the few ‘bad apples’ to questions about the ‘bushel’ that contains them. The widespread and systematically interconnected nature of these ethical lapses threatens the markets in a fundamental way.
منابع مشابه
Asymmetric Reporting
We generalize the CAPM to a setting where a regulator requires firms to report earnings before their shares are publicly traded but does not specify the reporting system that maps economic income into reported earnings. We show that under fairly mild conditions, a riskaverse entrepreneur (as representative of the initial owners of the firm) will endogenously choose a reporting system where repo...
متن کاملVoluntary Disclosures and Corporate Control
We examine the valuation and capital allocation roles of voluntary disclosure when managers have private information regarding the firm’s investment opportunities, but an efficient market for corporate control influences their investment decisions. For managers with long-term stakes in the firm, the equilibrium disclosure region is two-tailed: only extreme good news and extreme bad news is disc...
متن کاملCostless Versus Costly Signaling in Capital Markets: Theory and Evidence
A good type can separate itself from a bad type by giving a costly signal; the bad type will not mimic because the signal is costlier for the bad type. A good type can also separate itself from a bad type by attracting scrutiny; the bad type will not mimic because the bad type will not risk attracting scrutiny and being discovered. The contribution of this paper is to develop a simple model to ...
متن کاملPartial Irreversible Investment and Cyclical Capital Reallocation: the Role of Adverse Selection
There are two facts related to the reallocation of physical assets across plants. In the macro level, capital reallocation, measured as the aggregate sales of used capital, is procyclical. In the micro level, selling used capital is costly. In this paper, I investigate the quantitative contribution of adverse selection in the used capital market towards generating the procyclical capital reallo...
متن کامل