42,365 research outputs found

    Corporate governance, moral hazard and conflict of interest in Italian universal banking, 1914-1933

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    Universal banking is widely held to enjoy comparative advantages in corporate finance. Recent theories of financial intermediation argue that 'insider systems' are better suited to effectively deal with long-term growth and moral hazard problems. However, little attention (if any) is usually paid to corporate governance problems that are specific to universal banking. How can banks' ownership structure and agency problems influence their ability to address longterm growth and moral hazard problems? Under which institutional arrangements, incentives and constraints can universal banking effectively realize its potential? The paper looks at such issues through the experience of interwar Italy. The evolution of universal banking in the 1920s emerges as heavily exposed to potentially serious problems of moral hazard and conflicts of interest, due to inefficient corporate governance, lack of external controls and a moral-hazard-enhancing institutional set-up. These factors may distort bank managers' incentives, affect strategic trade-offs and lead to unsound banking. The findings are consistent with that part of corporate governance literature which points to the potential for moral hazard and conflicts of interest inherent to universal banking and emphasise the conditional and historically-specific nature of its alleged benefits

    The Missing Monitor in Corporate Governance: The Directors\u27 & Officers\u27 Liability Insurer

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    This article reports the results of empirical research on the monitoring role of directors\u27 and officers\u27 liability insurance (D&O insurance) companies in American corporate governance. Economic theory provides three reasons to expect D&O insurers to serve as corporate governance monitors: first, monitoring provides insurers with a way to manage moral hazard; second, monitoring provides benefits to shareholders who might not otherwise need the risk distribution that D&O insurance provides; and third, the bonding provided by risk distribution gives insurers a comparative advantage in monitoring. Nevertheless, we find that D&O insurers neither monitor corporate governance during the life of the insurance contract nor manage litigation defense costs once claims arise. Our findings raise significant questions about the value of D&O insurance for shareholders as well as the deterrent effect of corporate and securities liability. After exploring various explanations for these findings, we conclude that the absence of monitoring is due, at least in part, to the agency problem in the corporate context. Our analysis thus suggests that the existing form of corporate D&O insurance both results from and contributes to the relatively weak constraints on corporate managers. Corporate managers buy D&O coverage for self-serving reasons, and the coverage itself because it does not control moral hazard, reduces the extent to which shareholder litigation aligns managers\u27and shareholders\u27 incentives

    The Missing Monitor in Corporate Governance: The Directors\u27 & Officers\u27 Liability Insurer

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    This article reports the results of empirical research on the monitoring role of directors\u27 and officers\u27 liability insurance (D&O insurance) companies in American corporate governance. Economic theory provides three reasons to expect D&O insurers to serve as corporate governance monitors: first, monitoring provides insurers with a way to manage moral hazard; second, monitoring provides benefits to shareholders who might not otherwise need the risk distribution that D&O insurance provides; and third, the bonding provided by risk distribution gives insurers a comparative advantage in monitoring. Nevertheless, we find that D&O insurers neither monitor corporate governance during the life of the insurance contract nor manage litigation defense costs once claims arise. Our findings raise significant questions about the value of D&O insurance for shareholders as well as the deterrent effect of corporate and securities liability. After exploring various explanations for these findings, we conclude that the absence of monitoring is due, at least in part, to the agency problem in the corporate context. Our analysis thus suggests that the existing form of corporate D&O insurance both results from and contributes to the relatively weak constraints on corporate managers. Corporate managers buy D&O coverage for self-serving reasons, and the coverage itself because it does not control moral hazard, reduces the extent to which shareholder litigation aligns managers\u27and shareholders\u27 incentives

    Controlling Systemic Risk Through Corporate Governance

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    Most of the regulatory measures to control excessive risk taking by systemically important firms are designed to reduce moral hazard and to align the interests of managers and investors. These measures may be flawed because they are based on questionable assumptions. Excessive corporate risk taking is, at its core, a corporate governance problem. Shareholder primacy requires managers to view the consequences of their firm’s risk taking only from the standpoint of the firm and its shareholders, ignoring harm to the public. In governing, managers of systemically important firms should also consider public harm. This proposal engages the long-standing debate whether corporate governance law should require some duty to the public. The accepted wisdom is that corporate profit maximization provides jobs and other benefits that exceed public harm. The debate requires rethinking for systemic economic harm. This policy brief rethinks that debate, demonstrating that a corporate governance duty can be designed to control systemic risk without unduly weakening wealth production

    The role of external auditors in corporate governance: agency problems and the management of risk

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    This paper not only recommends means whereby principal-agent problems could be addressed, but also considers various ways in which the external auditor and audit committees contribute as corporate governance tools. The impact of bank regulations on risk taking and the need for a consideration of ownership structures are amongst other issues which are considered. In acknowledging the issues raised by ownership structures, it considers theories such as the banking theory and corporate governance theory. It also considers other alternatives whereby risk taking could be controlled. In recommending the external auditor’s expertise to address principal agent problems, it draws attention to the audit committee’s roles, both as a vital and complementary corporate governance tool, and also considers recurring problems which still persist with some financial reporting standards. It also highlights the importance of measures which need to be in place if the external auditor’s contribution to corporate governance is to be maximised.corporate governance; banking theory; risk; ownership structures; auditor; disclosure; principal; agent; regulation; moral hazard

    Financial fragility under implicit insurance scheme: Evidence from the collapse of Thai financial institutions

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    Using the Thai experience as a clinical study of a financial crisis, we investigate financial failures of Thai financial institutions. This study augments the CAMEL perspective by considering corporate governance and the moral hazard problems under the state of implicit government guarantee. The overall results suggest that high-replicated CAMEL ratings and downgrades of the ratings based on accounting-based information are likely to be important indicators of bank fragility. The ownership-based incentives of the largest shareholders and the level of risk associated with moral hazard problems are also factors that help discriminate sound and unsound financial institutions.CAMEL rating, incentives, deposit insurance, financial failure, Thai financial institutions

    Project Finance as a Risk-Management Tool in International Syndicated Lending

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    We develop a double moral hazard model that predicts that the use of project finance increases with both the political risk of the country in which the project is located and the influence of the lender over this political risk exposure. In contrast, the use of project finance should decrease as the economic health and corporate governance provisions of the borrower’s home country improve. When we test these predictions with a global sample of syndicated loans to borrowers in 139 countries, we find overall support for our model and provide evidence that multilateral development banks act as ñ€Ɠpolitical umbrellasñ€.project finance; syndicated loans; political risk; double moral hazard

    The corporate managers and stockholders relationship: the moral hazard issue, case of Moroccan listed companies

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    This paper deals with the moral hazard problem associated with the behavior of corporate managers. The stockholders (shareholders) cannot control ex ante the managers, because the latter’s action is unobservable to the former, and the stockholders cannot oblige the managers to choose an action which is effective and benefit both parties. The stockholders may not modify the impact of action taken by managers if and only if they decide to condition the action payment to the final observable income. In the specific context of emerging markets listed companies in where the level of opacity and the inefficiency to monitor are very high, the revelation principle does not play correctly. Therefore, it is not interesting to the Agent to show his true type. In this Paper we will specifically deal with this type of problem within the framework of companies listed in the Casablanca Stock Exchange. Our approach consists to show the moral hazard issue existing between two parties: the stockholders (i.e., uninformed “Principal”) and the manager namely the Chief Executive Officer (i.e., informed “Agent”).Asymmetrical Information; Moral Hazard; Non-fulfilment of Contract; Governance of Listed Companies; Collusion; Cooperative Game; Stockholders; Corporate Managers; Casablanca Stock Exchange.

    The Missing Monitor in Corporate Governance: The Directors\u27 and Officers\u27 Liability Insurer

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    This article reports the results of empirical research on the monitoring role of directors’ and ofïŹcers’ liability insurance (D&O insurance) companies in American corporate governance. Economic theory provides three reasons to expect D&O insurers to serve as corporate governance monitors: ïŹrst, monitoring provides insurers with a way to manage moral hazard; second, monitoring provides beneïŹts to shareholders who might not otherwise need the risk distribution that D&O insurance provides; and third, the “bonding” provided by risk distribution gives insurers a comparative advantage in monitoring. Nevertheless, we ïŹnd that D&O insurers neither monitor corporate governance during the life of the insurance contract nor manage litigation defense costs once claims arise. Our ïŹndings raise signiïŹcant questions about the value of D&O insurance for shareholders as well as the deterrent effect of corporate and securities liability. After exploring various explanations for these ïŹndings, we conclude that the absence of monitoring is due, at least in part, to the agency problem in the corporate context. Our analysis thus suggests that the existing form of corporate D&O insurance both results from and contributes to the relatively weak constraints on corporate managers. Corporate managers buy D&O coverage for self-serving reasons, and the coverage itself, because it does not control moral hazard, reduces the extent to which shareholder litigation aligns managers ’and shareholders ’incentives

    How Ownership Structure Affects Capital Structure and Firm Performance? Recent Evidence from East Asia

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    Despite the seminal work of Claessens et al. (2002), who highlighted the role of ownership structure on firm performance in East Asia, the relationship between capital structure and ownership remains much unexplored. This is important, given recent empirical and theoretical work linking capital structure and performance. The novelty of the present paper is that in examining the effects of ownership concentration on capital structure and firm performance, it not only allows for simultaneity between capital structure and firm performance, but also controls for one possible source of moral hazard related to the higher voting rights relative to cash flow rights. The paper clearly establishes that results are rather country-specific and the effects of ownership structure on firm performance cannot be delineated from its effects on leverage. More interestingly, these results highlight that higher voting rights could pose some moral hazard problem if there is a controlling manager shareholder called Cronyman in our analysis. Evidently family ownership could mitigate some of these moral hazard problems, though it could exacerbate the problem of over-lending. As such, the results presented here confirm and extend the essential findings of Claessens et al. (2002).Asian Crisis, Corporate Governance, Capital structure, Firm performance, Expropriation of minority shareholders, Moral hazard, 3SLS estimates, Simultaneity bias, Non-linearity.
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