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Carrots for Vetogates: Incentive Systems to Promote Capital Market Gatekeeper Effectiveness

Lawrence A. Cunningham

George Washington University

Minnesota Law Review, Vol. 92, 2007
Boston College Law School Research Paper No. 131

This Article contributes a novel idea to the literature on capital market gatekeepers: positive incentive systems for gatekeepers to perform functions not required of them in exchange for rewards if they perform the functions successfully. Capital market gatekeeping theory relies upon the reputations that gatekeepers are assumed to command and protect backstopped by negative threats of legal liability for failure to perform legally mandated functions. The ineffectiveness of many gatekeepers during the late 1990s and early 2000s revealed practical limitations of the reputational constraint and the reforms that responded to the failures continue to emphasize the legal duties and legal liability that gatekeepers face. Adversely, that emphasis discourages gatekeepers from willingness to perform desired functions - such as to detect for fraud - whereas the positive approach induces performance of such functions. Without necessarily displacing existing reputation constraints and liability strategies, adding an incentive system as a public policy lever could promote gatekeeper effectiveness and poses little downside risk.

Number of Pages in PDF File: 53

Keywords: gatekeepers, auditors, lawyers, incentive compensation, reputation, liability

JEL Classification: G20, G28, G30, K00, K10, K20, K22, K40, L20, L13

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Date posted: April 17, 2007  

Suggested Citation

Cunningham, Lawrence A., Carrots for Vetogates: Incentive Systems to Promote Capital Market Gatekeeper Effectiveness. Minnesota Law Review, Vol. 92, 2007; Boston College Law School Research Paper No. 131. Available at SSRN: https://ssrn.com/abstract=980949

Contact Information

Lawrence A. Cunningham (Contact Author)
George Washington University ( email )
2000 H Street, N.W.
Washington, DC 20052
United States
202-994-0732 (Phone)

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