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Corporate ‘excesses’ and financial market dynamics

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  • Angela Maddaloni
  • Darren Pain

Abstract

The recent corporate failures in the US and in Europe have considerably damaged investors’ confidence in the functioning of financial markets and the ability of the regulatory framework to safeguard their interest and prevent fraud. These episodes demonstrate that market failures exist, which can undermine the effectiveness of market discipline to ensure the appropriate allocation of capital. Specifically the paper considers four particular features of financial markets that may have given rise to market failures: (a) perverse incentives/conflict of interests, (b) destabilising trading/investment strategies, (c) lack of disclosure/transparency and (d) concentrated versus fragmented ownership structures. The paper reviews the theoretical arguments and empirical evidence related to these four possible types of market failures, illustrating these with evidence drawn from the most recent corporate scandals. The last part of the paper is devoted to the policy responses both in the US and in Europe to prevent these failures.

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Bibliographic Info

Paper provided by European Central Bank in its series Occasional Paper Series with number 17.

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Length: 52 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:ecb:ecbops:20040017

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References

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Citations

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Cited by:
  1. Jesper Berg & Annalisa Ferrando & Gabe de Bondt & Silvia Scopel, 2005. "The bank lending survey for the euro area," Occasional Paper Series 23, European Central Bank.
  2. Yener Altunbaş & Alper Kara & Adrian van Rixtel, 2007. "Corporate governance and corporate ownership: The investment behaviour of Japanese institutional investors," Banco de Espa�a Occasional Papers 0703, Banco de Espa�a.
  3. Henrik Enderlein & Johannes Lindner & Oscar Calvo-Gonzalez & Raymond Ritter, 2005. "The EU budget – how much scope for institutional reform?," Occasional Paper Series 27, European Central Bank.
  4. Frank Dierick & Fatima Pires & Martin Scheicher & Kai Gereon Spitzer, 2005. "The New Basel Capital Framework and its implementation in the European Union," Occasional Paper Series 42, European Central Bank.
  5. Ignazio Angeloni & Michael Flad & Francesco Paolo Mongelli, 2005. "Economic and monetary integration of the new Member States - helping to chart the route," Occasional Paper Series 36, European Central Bank.
  6. Reinhard Petschnigg, 2005. "The institutional framework for financial market policy in the USA seen from an EU perspective," Occasional Paper Series 35, European Central Bank.
  7. Filippo Altissimo & Evaggelia Georgiou & Teresa Sastre & Maria Teresa Valderrama & Gabriel Sterne & Marc Stocker & Mark Weth & Karl Whelan & Alpo Willman, 2005. "Wealth and asset price effects on economic activity," Occasional Paper Series 29, European Central Bank.
  8. Reiner Martin & Moreno Roma & Isabel Vansteenkiste, 2005. "Regulatory reforms in selected EU network industries," Occasional Paper Series 28, European Central Bank.
  9. Maria Gabriella Briotti, 2005. "Economic reactions to public finance consolidation - a survey of the literature," Occasional Paper Series 38, European Central Bank.
  10. Adalbert Winkler & Roland Beck, 2006. "Macroeconomic and financial stability challenges for acceding and candidate countries," Occasional Paper Series 48, European Central Bank.
  11. Guido Wolswijk & Jakob de Haan, 2005. "Government debt management in the euro area - recent theoretical developments and changes in practices," Occasional Paper Series 25, European Central Bank.
  12. Heiko Schmiedel & Andreas Schönenberger, 2005. "Integration of securities market infrastructures in the euro area," Occasional Paper Series 33, European Central Bank.
  13. Véronique Genre & Daphne Momferatou & Gilles Mourre, 2005. "Wage diversity in the euro area - an overview of labour cost differentials across industries," Occasional Paper Series 24, European Central Bank.
  14. Daniela Russo & Terry L. Hart & Chryssa Papathanassiou, 2004. "Governance of securities clearing and settlement systems," Occasional Paper Series 21, European Central Bank.
  15. André Geis & Arnaud Mehl & Stefan Wredenborg, 2004. "The international role of the euro - evidence from bonds issued by non-euro area residents," Occasional Paper Series 18, European Central Bank.
  16. Christian Thimann & Regine Wölfinger & Thierry Bracke & Rita Bessone Basto & Ole Hollensen & Stephan von Stenglin & Santiago Fernández de Lis & Pierre-François Weber & Marco Committeri & Rolf Pauli, 2005. "Managing financial crises in emerging market economies - experience with the involvement of private sector creditors," Occasional Paper Series 32, European Central Bank.
  17. Leena Mörttinen & Paolo Poloni & Patrick Sandars & Jukka Vesala, 2005. "Analysing banking sector conditions - how to use macro-prudential indicators," Occasional Paper Series 26, European Central Bank.

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