M16_MISH1438_06_IM_C16

M16_MISH1438_06_IM_C16 - Chapter 16 What Should Be Done...

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Chapter 16 What Should Be Done About Conflicts of Interest? A Central Issue in Business Ethics What Are Conflicts of Interest and Why Are They Important? Why Do We Care About Conflicts of Interest? Ethics and Conflicts of Interest Types of Conflicts of Interest Underwriting and Research in Investment Banking Conflicts of Interest Box: The King, Jack and Queen of the Internet Conflicts of Interest Box: Frank Quattrone and Spinning Auditing and Consulting in Accounting Firms Conflicts of Interest Box: The Demise of Arthur Andersen Credit Assessment and Consulting in Credit-Rating Agencies Mini-Case Box: Why Do Issuers of Securities Pay to Have Their Securities Rated? Universal Banking Conflicts of Interest Box: Banksters Can the Market Limit Exploitation of Conflcits of Interest? What Has Been Done to Remedy Conflicts of Interest? Sarbanes-Oxley Act of 2002 Global Legal Settlement of 2002 A Framework for Evaluating Policies to Remedy Conflicts of Interest Approaches to Remedying Conflicts of Interest
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92 Mishkin/Eakins • Financial Markets and Institutions, Sixth Edition Case : Evaluating Sarbanes-Oxley and the Global Legal Settlement Overview and Teaching Tips Recent corporate and accounting scandals have attracted tremendous public attention and are of particular interest to students because resulting bankruptcies have cost employees of these firms their jobs and their pensions, and because the scandals may have hampered the efficient functioning of the financial system. In addition, the growing concerns about the proliferation and effects of conflicts of interest has resulted in the decision of many business schools to add business ethics courses to their curriculums. This chapter allows the instructor to discuss ethical issues, but with the analysis grounded on the asymmetric information concepts featured so prominently in this book. When I teach this material, I start by emphasizing that conflicts of interest occur when people who are supposed to act in the interests of the investing public by providing them with reliable information, instead have incentives (conflicting interests) to deceive the public to benefit themselves and their corporate clients. I then encourage the students to discuss which conflicts of interest arise in different sectors of the financial services industry. Then I emphasize how central information issues are in understanding why conflicts of interest occur and what remedies make sense to deal with them. The key point that comes out of this analysis is that conflicts of interest are only damaging if they reduce information flows in financial markets. This information-based framework for evaluating conflicts of interest raises two key points: 1. The fact that a conflict of interest exist does not mean that it necessarily has adverse consequences, and 2. Even if incentives to exploit conflicts of interest remain strong, eliminating the economies of scope that create the conflicts of interest may be harmful because it might reduce the flow of reliable information. The chapter ends by describing five approaches to remedying conflicts of interest: 1. leave it to the market,
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M16_MISH1438_06_IM_C16 - Chapter 16 What Should Be Done...

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