Abstract
The last years have seen a surge of scandals in financial intermediation. This article argues that the agency structure inherent to most forms of financial intermediation gives rise to conflicts of interest. Though this does not excuse scandalous behavior it points out market imperfections. There are four types of conflicts of interest: personal-individual, personal-organizational, impersonal-individual, and finally, impersonal-organizational conflicts. Analyzing recent scandals we find that all four types of conflicts of interest prevail in financial intermediation.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Badaracco J. L. (1997) Defining Moments. When Managers Must Choose Between Right and Right, Boston: Harvard Business School Press
Badaracco J. L., Webb A. P. (1995) Business Ethics: A View from the Trenches. California Management Review 37(2):8–25
Banner S. (1997) What Causes New Securities Regulation? 300 Years of Evidence. Washington University Law Quarterly 75, 849–55
Bazerman M. H., Tenbrunsel A. E., Wade-Benzoni K. (1998) Negotiating With Yourself and Losing: Making Decisions With Competing Internal Preferences. Academy of Management Review, 23(2), 225–241
Bernheim V. L., Whinston M. D. (1986) Common Agency. Econometrica 54(4), 923–942
Blader S. L., Tyler T. R. (2003) What Constitutes Fairness in Work Settings? A Four-Component Model of Procedural Justice. Human Resource Management Review 12, 107–126
Boatright J. R. (1999) Ethics in Finance. Malden, MA: Blackwell Publishers
Boatright J. R. (2000) Conflicts of Interest in Financial Services. Business and Society Review 105(2), 201–219
Carmichael J., Pomerleano M. (2002) The Development and Regulation of Non-Bank Financial Institutions. Washington, DC: The World Bank
Carson T. L. (2004) Conflicts of Interest and Self-dealing in the Professions. A Review Essay. Business Ethics Quarterly 14(1), 161–182
Caza A., Barker B. A., Cameron K. S. (2004) Ethics and Ethos: The Buffering and Amplyfing Effects of Ethical Behavior and Virtuousness. Journal of Business Ethics 52, 169–178
CBSnews .com (2003) ‹Senators Slam SEC In Funds Scandal’. November 3
Chan L. K. C., J. Karceski and J. Lakonishok: 2003, ‹Analysts Conflicts of Interest and Biases in Earning Forecasts’, NBER Working Paper No w9544
Chavous J. D., Maulbetsch, S. Pferdekämper and M. Frantz: 2004, ‹Investment Banking Exposure’, American Re research paper. http://www.amre.com/content/iw/invest_bank_exp.pdf. Accessed May 2, 2005
Craig S.: 2002, ‹Offerings Were Easy Money for Ebbers’, Wall Street Journal 2 September
Crockett A., Harris T., Mishkin F. S. (2004) Conflicts of Interest in the Financial Services Industry: What Should We Do About Them? London: Centre for Economic Policy Research
Dickson M. W., Smith D. B., Grojean M. W., Ehrhart M. (2001) An Organizational Climate Regarding Ethics: The Outcome of Leader Values and the Practices That Reflect Them. Leadership Quarterly 12, 197–217
Dobson J. (1993) The Role of Ethics in Finance. Financial Analysts Journal 49(6), 57–61
Dobson J. (1997) Ethics in Finance II. Financial Analysts Journal 53(1), 15–25
Dodd A.: 2003, ‹Valuation of Government Securities – Yield Burning’. Tax Exempt Bond Abusive Tax Transactions, Internal Revenue Service, US Department of the Treasury, pp.107–121 http://www.irs.ustreas.gov/pub/irs-tege/teb2a03.pdf. Accessed February 10, 2007
Economist : 2003, ‹Revolting Shareholders’, May 22nd, 2003
Economist : 2003a, ‹The Shakedown Continues’, June 27th, 2003
Economist : 2003b, ‹Perils in the Savings Pool’. Nov. 6th, 2003
Freixas X., Rochet J.-C. (1997) Microeconomics of Banking. Cambridge, Massachusetts: The MIT Press
French S., Leyshon A. (2004) The New, New Financial System? Towards a Conceptualization of Financial Reintermediation. Review of International Political Economy 11(2), 263–288
Frey B. S. (1997) Not Just for the Money: An Economic Theory of Personal Motivation. Cheltenham, UK.: Edward Elgar
Frieswick K.: 2002, ‹More bricks in the wall’, CFO Asia, November 2. http://www.cfoasia.com/archives/200211–03.htm, accessed May 17, 2005
Ghoshal S., Moran P. (1996) Bad for Practice: A Critique of the Transaction Cost Theory. Academy of Management Review 21(1), 13–47
Greenberg J. (1993) Stealing in the Name of Justice: Informational and Interpersonal Moderators of Theft Reactions to Underpayment Inequity. Organizational and Human Decision Processes, 54, 81–103
Hampden-Truner Ch., Trompenaars A. (1993) The Seven Cultures of Capitalism. Value Systems of Creating Wealth in the United States, Japan, Germany, France, Britain, Sweden, and the Netherlands. New York: Currency Doubleday
Jackson T. (2000) Management Ethics and Corporate Policy: A Cross-Cultural Comparison. Journal of Management Studies 37(3), 349–369
James H. S. Jr. (2000) Reinforcing Ethical Decision Making Through Organizational Structure. Journal of Business Ethics 28, 43–58
Jansen E., Von Glinow M. A. (1985) Ethical Ambivalence and Organizational Reward Systems. Academy of Management Review, 10(4), 814–822
Jensen M. C., Meckling W. H. (1976) Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics 3, 305–360
Kroszner R. S. and P. E. Strahan: 2001, ‹Throwing Good Money After Bad? Board Connections and Conflicts in Bank Lending’, NBER Working Paper No w8694
Mahoney P. G. (2004) Manager-Investor Conflicts in Mutual Funds. Journal of Economic Perspectives 18(2), 161–182
Moore D. A., Tetlock P. E., Tanlu L., & Bazerman M. H. (2006) Conflicts of Interest and the Case of Auditor Independence: Moral Seduction and Strategic Issue Cycling. Academy of Management Review, 31(1), 10–29
Paine L. S. (1995) Managing for Organizational Integrity. Harvard Business Review, 72(2), 106–117
Scherer A. G., Palazzo G., & Baumann D. (2006) Global Rules and Private Actors. Towards a New Rrole of the TNC in Global Governance. Business Ethics Quarterly 16, 505–532
Schwartz R. A., Steil B. (2002) Controlling Institutional Trading Costs. Journal of Portfolio Management 28(3), 39–50
Smircich L., Stubbart C. (1985) Strategic Management in an Enacted World. Academy of Management Review 10, 724–736
Smith R.: 2003, ‹Morgan Stanley is informed by SEC it may face charges’, Wall Street Journal 14 April
Smith R., S. Craig and D. Solomon: 2003, ‹Wall Street firms to pay $1.4 billion to end inquiry’, Wall Street Journal 29 April
Solomon R. C. (1993) Ethics and Excellence. Oxford, UK: Oxford University Press
Solomon D.: 2003, ‹Deals and Deal Makers: Morgan Stanley remarks draw criticism by SEC’, Wall Street Journal 2 May
Stansbury J., Barry B. (2007) Ethics Programs and the Paradox of Control. Business Ethics Quarterly, 17(2), 239–261
Stiglitz J. E. (2003) The Roaring Nineties: Seeds of Destruction. London: Allen Lane
Suchan S. W.: 2004, ‹Post-Enron: U.S. and German Corporate Governance’. Cornell Law School. Cornell Law School LL.M. Papers Series 4, http://lsr.nellco.org/cornell/lps/papers/4. Accessed April 30, 2005
Thielemann U., Ulrich P. (2003) Brennpunkt Bankenethik: Der Finanzplatz Schweiz in wirtschaftsethischer Perspektive. Bern: Haupt
Trevino L. K.: 1996, ‹Ethical Decision Making in Organizations: A Person-Situation Interactionist Model’, Academy of Management Review 11(3), 601–617
U.S. Securities and Exchange Commission: 2000–2007, Press Releases, http://www.sec.gov/news/press. shtml. Accessed February 10, 2007
Valdez S., Wood J. (2003) An Introduction to Global Financial Markets. 4th ed., Basingstoke, Hampshire: Palgrave Macmillan
Wahlen C. (2003) Revisiting Sarbanes-Oxley. The International Economy 17(4), 40–43
Walsh J. P., Ungson G. R. (1991) Organizational Memory. Academy of Management Review 16, 57–91
Walter I.: 2003, ‹Conflicts of Interest and Market Discipline Among Financial Services Firms’. Paper presented at Federal Reserve of Chicago – Bank for International Settlement conference on “Market Discipline: Evidence Across Countries and Industries”, October 30–November 1. http://pages.stern.nyu.edu/∼iwalter/, accessed February 11, 2007
Walter I.: 2006, ‹Reputational Risk and Conflicts of Interest in Banking and Finance: The Evidence So Far’. Working Paper, http://papers.ssrn.com/sol3/papers.cfm?abstract_id = 952682#PaperDownload, accessed February 11, 2007
Weaver G. R., L. K, Trevino, Cochran P. L. (1999) Corporate Ethics Programs as Control Systems: Influences of Executive Commitment and Environmental Factors. Academy of Management Journal 42(1), 41–57
Weber J. (1991) Adapting Kohlberg to Enhance the Assessment of Managers Moral Reasoning. Business Ethics Quarterly 1(3), 293–318
Weick K. E. (1995) Sensemaking in Organizations. Thousand Oaks: Sage
Wighton D.: 2007, ‹Paulson Backs Efforts to Tackle Competitiveness Threat to Wall St.’, Financial Times January 23, p. 5
Zimbardo P. G. (2004) A Situationist Perspective on the Psychology of Evil: Understanding How Good People are Ttransformed into Perpetrators. In: A. Miller (eds) The Social Psychology of Good and Evil: Understanding our Capacity for Kindness and Cruelty. New York: Guilford, pp. 21–50
Zimbardo P. G. (2007) The Lucifer Effect: Understanding How Good People Turn Evil. New York: Random House
Zitzewitz E. (2003) Who Cares about Shareholders? Arbitrage-Proofing Mutual Funds. Journal of Law, Economics & Organization 19(2), 245–280
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Palazzo, G., Rethel, L. Conflicts of Interest in Financial Intermediation. J Bus Ethics 81, 193–207 (2008). https://doi.org/10.1007/s10551-007-9488-z
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-007-9488-z