"Analyst Recommendations and Regulation: Scopes for European Policy Makers to Enhance Investor Protection" Free Download

ANDREAS HÖFER, Bamberg University
ANDREAS OEHLER, Bamberg University

Investors rely on analyst recommendations when making investment decisions. Over the last few years, however, sell-side analysts have caught the attention of the supervisory authorities given their vulnerability to numerous conflicts of interest. In this paper, we empirically examine relevant regulatory measures that have an impact upon analysts’ activities, namely the Market Abuse Directive (MAD) and Markets in Financial Instruments Directive (MiFID). We find that European regulators have primarily focused on mitigating conflicts of interest. However, to establish an environment of more sophisticated investor protection additional regulatory effort is required. Therefore, in this paper, we provide related empirical evidence and discuss proposals to correct regulatory shortcomings in order to strengthen investor protection in the European Union.

"The Duty of Loyalty in Trust Law" Free Download

MELANIE L. FEIN, Fein Law Offices

The duty of loyalty has been a bedrock principle of trust law for hundreds of years. More recently, it has been applied outside the traditional trust sphere to a widening array of fiduciary relationships in the wealth management business. Questions concerning the nature and scope of the duty have arisen with increasing frequency and are affecting how wealth management services are delivered. New and emerging iterations of the duty of loyalty have not departed from the fundamental trust law principle that the interests of the fiduciary must be subordinated to those of the client. Nevertheless, subtle distinctions in the way the duty is interpreted may result in significant differences in the way it is applied in specific contexts. To assist in efforts to clarify the nature and scope of the duty of loyalty, this paper examines the duty in its strictest form as it currently exists in trust law as a baseline for analysis. As modern revisions of trust law indicate, the duty of loyalty is not absolute and may accommodate a wide range of fiduciary relationships and activities necessary for trustees and other wealth managers to serve their customers effectively and efficiently. The trust law duty of loyalty thus remains an important guidepost for the application of fiduciary standards in the broader wealth management business.

"Legal Theory Lessons from the Financial Crisis" Free Download

DAVID M. DRIESEN, Syracuse University - College of Law

This Article draws lessons about the theory of law and economics from the recent financial crisis. It argues that the financial crisis teaches us that allocative efficiency, the main goal of law and microeconomics, proves an unattainable and relatively unimportant goal for laws addressing complex systems. It shows that complexity and the institutional role of law make calculation of optimal rules impossible for complex systems like those addressed through financial regulation, intellectual property, antitrust law, environmental law, and national security law.

Drawing primarily on the financial crisis, this Article identifies the features of complex systems that make mathematical calculation of costs and benefits impossible. Apparently recognizing that complexity defeats identification of optimal rules through cost-benefit analysis, law and economics scholars have used assumptions of rationality and perfect information as a substitute for quantitative analysis. The financial crisis teaches us that this CBA-substitute dangerously supports deregulatory ideology. Furthermore, the dynamic nature of complex systems renders any equilibrium between costs and benefits short-lived and therefore of relatively little value.

This Article also shows law’s institutional function as providing a framework that can accommodate a variety of transactions makes prediction of efficient outcomes extremely unlikely. For this institutional role implies that law does not usually determine resource allocation.

This Article addresses the question about what to do about law and microeconomics’ failure by proposing a more macroeconomic approach to law. This economic dynamic approach would treat law as an effort to countervail negative trends over time with a goal of avoiding systemic risks while keeping a reasonably robust set of economic opportunities open. It sketches a methodological approach to accomplishing these goals rooted in institutional economics and the best practices of law and economics scholars.

"Fiduciary Standard and Financial Advice: Findings from Academic Literature" Free Download

MICHAEL S. FINKE, Texas Tech University

This article provides an overview of theory and empirical evidence related to the benefits and costs resulting from the application of a fiduciary standard of care to the conduct of brokers, dealers (broker-dealers), and investment advisors. The purpose of this document is not to advocate a position on possible regulatory actions. It is intended to provide an in-depth review of the extant literature, primarily from economics, finance, and law, related to the regulation, incentives, and outcomes of the existing advice marketplace. Opinions on the likely impact of various strategies on the marketplace are entirely those of the author and are based on the preponderance of empirical evidence and the strength of related theories.

"Excess Control Rights, Bank Capital Structure Adjustments and Lending" 
Journal of Financial Economics (JFE), Forthcoming

LAETITIA LEPETIT, Universite de Limoges, LAPE
AMINE TARAZI, Universite de Limoges, LAPE
NADIA ZEDEK, Universite de Limoges, LAPE

We investigate whether excess control rights of ultimate owners in pyramids affect banks' capital ratio adjustments. When control and cash-flow rights are identical, to boost capital ratios banks issue equity without cutting lending. However, when control rights exceed cash-flow rights, instead of issuing equity, banks downsize by reducing lending. Such a finding is mostly prevalent in countries with weak shareholder protection or for family-controlled banks. Other factors also explain the extent to which such banks reduce lending. Our findings contribute to the capital structure adjustment literature and have critical policy implications for the implementation of Basel III and the debate on capital requirements and bank lending.


About this eJournal

This eJournal distributes working and accepted paper abstracts covering regulatory and legal aspects of national and international financial institutions. The eJournal welcomes research that deals with legal aspects of depository institutions including banks, credit unions, trust companies, and mortgage loan companies. Topics also include regulation of insurance companies, brokers, underwriters, and investment funds.

Editors: G. William Schwert, University of Rochester, and Rene M. Stulz, Ohio State University (OSU)


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Advisory Board

Regulation of Financial Institutions eJournal

Max L. Heine Professor of Finance and Vice Director, New York University (NYU) - Salomon Center, Max L. Heine Professor of Finance, New York University (NYU) - Department of Finance

Professor of Finance and Dykema Professor of Business Administration, The Stephen M. Ross School of Business at the University of Michigan

Morgan Stanley Investment Management

Joseph E. Boettner Professor, Temple University, Harry J. Loman Professor Emeritus, University of Pennsylvania - Insurance & Risk Management Department

Merton H. Miller Distinguished Service Professor of Finance, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago - Finance

Professor of Finance, New York University - Stern School of Business

Bank of America Professor of Managerial Leadership, Washington University in St. Louis - Olin Business School

Jesse Isidor Straus Professor of Business Administration, Emeritus, Harvard Business School, Co-Founder, Chairman, Managing Director and Integrity Officer, Social Science Electronic Publishing (SSEP), Inc., Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

Washington Mutual Endowed Chair in Innovation Professor of Finance, University of Washington - Michael G. Foster School of Business

Professor of Business Administration, University of Pittsburgh - Finance Group

University of Illinois at Chicago - Department of Finance

President, Federal Reserve Bank of Philadelphia, National Bureau of Economic Research (NBER)

Duke University - Fuqua School of Business

Sterling Professor of Law, Yale Law School

Distinguished University Professor of Finance and Statistics, University of Rochester - Simon School, National Bureau of Economic Research (NBER)

Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University (OSU) - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

Erwin H. Schell Professor of Management, Massachusetts Institute of Technology (MIT) - Sloan School of Management