Corporate 'Excesses' and Financial Market Dynamics

50 Pages Posted: 15 Nov 2005

See all articles by Angela Maddaloni

Angela Maddaloni

European Central Bank (ECB)

Darren Pain

Bank of England - Foreign Exchange Division

Date Written: July 2004

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.

Suggested Citation

Maddaloni, Angela and Pain, Darren, Corporate 'Excesses' and Financial Market Dynamics (July 2004). ECB Occasional Paper No. 17, Available at SSRN: https://ssrn.com/abstract=752066

Angela Maddaloni (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Darren Pain

Bank of England - Foreign Exchange Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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