PHI 2397 Lecture Notes - Lecture 1: Moral Hazard, Opportunism, Systemic Risk
4 Jul 2018
School
Department
Course
Professor
BOATRIGHT - FINANCE ETHIC
1. FINANCIAL MARKETS
The fundamental ethical requirements is to be fair
- Substantively: when price of security reflects actual price
- Procedurally: when buyers are enabled to determine actual value of security
- Financial markets are vulnerable to unfair practices - Fraud, manipulation, unfair
conditions, contractual difficulties
- Aim of federal laws is to ensure “fair and orderly” markets
- Goals of fairness and efficiency
Unfair Trading Practices
Hard to do when there are specular bubbles (housing markets)
Unfair because there can be fraud and manipulation
- Omit facts
- False statements are made
- Disclose information
- Fairness is compromised
Lead to unfair treatment in securities transaction, loss of investor confidence in integrity of
financial market, AND excess volatility (caused stock market crash)
Fair Conditions
Unequal information/information asymmetry
- All parties of transaction do not possess/have access to the same info
- Unfair only when the information has not been legitimately acquired (invest) or when its
in use violates some right or obligation.
- Also unfair when misappropriated from the rightful owner and that an insider who trades
on information that has been acquired in a fiduciary relations violates a fiduciary duty
Equal access to info is problematic b/c accessibility is not a feature of information itself but a
function of the investment that is required to obtain info
- Claim: anyone can become an inside trader if they devote enough resources
Main ethical requirement is that people do not use any advantage unfairly (bargaining power,
resources, processing abilities)
Info asymmetry
- Not all people have the same access to info as others and is only unfair when it hasn’t
been acquired illegally/used illegally
People can take advantage of others who don’t use the info correctly: The average investor,
where firms take adv but mutual funds has reduced that
Financial Contracting
Financial affairs would be impossible if every detail had to be made explicit
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
The fundamental ethical requirements is to be fair. Substantively: when price of security reflects actual price. Procedurally: when buyers are enabled to determine actual value of security. Financial markets are vulnerable to unfair practices - fraud, manipulation, unfair conditions, contractual difficulties. Aim of federal laws is to ensure fair and orderly markets. Hard to do when there are specular bubbles (housing markets) Unfair because there can be fraud and manipulation. Lead to unfair treatment in securities transaction, loss of investor confidence in integrity of financial market, and excess volatility (caused stock market crash) All parties of transaction do not possess/have access to the same info. Unfair only when the information has not been legitimately acquired (invest) or when its in use violates some right or obligation. Also unfair when misappropriated from the rightful owner and that an insider who trades on information that has been acquired in a fiduciary relations violates a fiduciary duty.
