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Corporate ‘excesses’ and financial market dynamics

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Author Info
Angela Maddaloni () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Darren Pain () (Bank of England, Threadneedle Street, London EC2R 8AH, United Kingdom.)

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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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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
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Handle: RePEc:ecb:ecbops:20040017

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  11. Madhavan, Ananth & Porter, David & Weaver, Daniel, 2005. "Should securities markets be transparent?," Journal of Financial Markets, Elsevier, vol. 8(3), pages 265-287, August. [Downloadable!] (restricted)
  12. Womack, Kent L, 1996. " Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-67, March. [Downloadable!] (restricted)
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  14. Roberto Perli & Brian Sack, 2003. "Does mortgage hedging amplify movements in long-term interest rates?," Finance and Economics Discussion Series 2003-49, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  1. Yener Altunbaş & Alper Kara & Adrian van Rixtel, 2007. "Corporate governance and corporate ownership: The investment behaviour of Japanese institutional investors," Banco de España Occasional Papers 0703, Banco de España. [Downloadable!]
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