The Public Corporation - Friend or Foe of Professional Ethics? Ownership and Ethics in Securities Brokerage

Abstract

Professions have long debated the desirability of outside investment and public ownership in particular. The traditional view holds that outside investors undermine professional ethics, and this fear underpins bans on public ownership. Others argue such restrictions are a way to reduce competition and that public ownership may improve adherence to professional ethics. I address this debate both conceptually and empirically. Conceptually, I develop several arguments both “for” and “against” public ownership and its effect on professionally ethical behavior. I also identify hypotheses to distinguish among these various arguments. Empirically, I test the hypotheses by assessing the incidence of professionally unethical behavior in the US securities industry across different ownership modes. I measure unethical behavior with a database of broker-client disputes resolved through arbitration. Using models with firm fixed effects to partially mitigate endogeneity concerns, I find that transitions to public ownership are followed by higher rates of ethical violations. Additional findings suggest the adverse effect on ethical behavior arises either because of public investors’ short-term preferences or the visibility of public firms’ performance. The results suggest that the regulators of a profession might indeed want to be cautious about liberalizing ownership rules or at least design disclosure and monitoring policies that acknowledge a greater risk of ethical violations at public firms. Public ownership should also be investigated as a predictor of organizational misconduct more broadly.