Conflicts of Interest and Market Discipline Among Financial Services Firms

36 Pages Posted: 4 Nov 2008  

Ingo Walter

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

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Date Written: October 2003

Abstract

There has been substantial public and regulatory attention of late to apparent exploitation of conflicts of interest involving financial services firms based on financial market imperfections and asymmetric information. This paper proposes a workable taxonomy of conflicts of interest in financial services firms, and links it to the nature and scope of activities conducted by such firms, including possible compounding of interest-conflicts in multifunctional client relationships. It lays out the conditions that either encourage or constrain exploitation of conflicts of interest, focusing in particular on the role of information asymmetries and market discipline, including the shareholder-impact of litigation and regulatory initiatives. External regulation and market discipline are viewed as both complements and substitutes - market discipline can leverage the impact of external regulatory sanctions, while improving its granularity though detailed management initiatives applied under threat of market discipline. At the same time, market discipline may help obviate the need for some types of external control of conflict of interest exploitation.

Suggested Citation

Walter, Ingo, Conflicts of Interest and Market Discipline Among Financial Services Firms (October 2003). NYU Working Paper No. 2451/27263. Available at SSRN: https://ssrn.com/abstract=1295181

Ingo Walter (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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New York, NY 10012
United States
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New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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