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Business is becoming increasingly international. At the same time, governments are intervening more in the conduct of business. A further development is the growing significance of emerging economies, many of which have a tradition of active government involvement with business. Taken together, these trends make it imperative to understand the relationships between firms and their institutional contexts. Conventional theories adopt an over-rationalized view of these relationships international business. Their apolitical perspective misses the fact that in order to build and maintain international operations, firms need to develop political relations with governments and institutions in home countries and abroad. The aim of this lecture is to develop an alternative perspective with particular reference to the internationalization of firms, large and small. This considers how multinationals gain international positions through bargaining power with foreign governments. By contrast, SMEs face liabilities in dealing with foreign governments and instead often have to achieve internationalization through networking with other SMEs, with domestic communities and support agencies via various forms of social innovation. The lecture concludes that political and social innovation perspectives open new research avenues in the field of international business.

PurposeThe primary purpose of the paper is to demonstrate how corporate responsibility and accountability could be fostered through monitoring and the involvement of governments in the regulation of firms.Design/methodology/approachIn considering why practices which stimulate incentives for private agents to exert corporate control should be encouraged, this paper highlights criticisms attributed to government control of banks. However, the theory relating to the “helping hand” view of government is advanced as having a fundamental role in the regulation and supervision of banks.FindingsGovernments have a vital role to play in corporate responsibility and regulation given the fact that banks are costly and difficult to monitor – this being principally attributed to the possibility that private agents will lack required incentives or the ability to supervise banks.Research limitations/implicationsBanks are costly and difficult to monitor – this being principally attributed to the possibility that private agents will lack required incentives or the ability to supervise banks.Practical implicationsThe paper illustrates how structures which operate in various systems, namely, stock market economies and universal banking systems, function (and attempt) to address gaps which may arise as a result of lack of adequate mechanisms of accountability.Social implicationsThe paper also draws attention to the impact of asymmetric information (generally and in these systems), on levels of monitoring procedures and how conflicts of interests which could arise between banks and their shareholders, or between governments and those firms being regulated by the regulator, could be addressed.Originality/valueThrough its supervision of banks, governments also assume an important role where matters related to the fostering of accountability are concerned – not only because banks may have the power to affect firm performance, but also because some private agents are not able to afford internal monitoring mechanisms.

This paper illustrates how trust in management can be consolidated through the order and mode of application of enforcement measures (negotiating and punitive enforcement measures) which are employed in facilitating and maximising compliance with rules. “Whilst negotiating strategies are introduced initially to develop trust between the regulator and the regulated, resort is made to more punitive strategies where an absence of trust in the compliance activity has been confirmed.” In considering techniques which could be introduced to maximise compliance with rules, standards and principles, this paper not only highlights why responsive and negotiating strategies are more effective than deterrence based strategies in facilitating compliance with rules and principles, but also the importance of introducing some element of fairness and high degree of accountability into the decision making process. Whilst fairness is considered to be of greater significance to decisions founded on principles and discretion, accountability is a benefit and feature which is usually attributed to “bright lines rules”. Even though it is contended that issues related to legitimacy and accountability could still arise with group decisions, this paper seeks to demonstrate that some degree of accountability (along with the fairness attributed to group decisions) could be fostered through corporate and group decision making. Furthermore, the paper highlights how effective communication can be achieved, how such communication – as well as an effective system of communication, is vital to determining the point at which there should be a departure from the systematic application of rules.

Expenditures on prescription drugs are one of the fastest growing components of national health care spending, rising by almost three-fold between 1995 and 2007. Coinciding with this growth in prescription drug expenditures has been a rapid rise in direct-to-consumer advertising (DTCA), made feasible by the Food and Drug Administration's (FDA) clarification and relaxation of the rules governing broadcast advertising in 1997 and 1999. This study investigates the separate effects of broadcast and non-broadcast DTCA on price and demand, utilizing an extended time series of monthly records for all advertised and non-advertised drugs in four major therapeutic classes spanning 1994-2005, a period which enveloped the shifts in FDA guidelines and the large expansions in DTCA. Controlling for promotion aimed at physicians, results from fixed effects models suggest that broadcast DTCA positively impacts own-sales and price, with an estimated elasticity of 0.10 and 0.04 respectively. Relative to broadcast DTCA, non-broadcast DTCA has a smaller impact on sales (elasticity of 0.05) and price (elasticity of 0.02). Simulations suggest that the expansion in broadcast DTCA may be responsible for about 19 percent of the overall growth in prescription drug expenditures over the sample period, with over two-thirds of this impact being driven by an increase in demand as a result of the DTCA expansion and the remainder due to higher prices.

This paper consolidates the work of its predecessor, “International Framework for Liquidity Risk Measurement, Standards and Monitoring: Corporate Governance and Internal Controls”, by considering monitoring tools which are considered to be essential if risks,(and in particular liquidity risks which are attributed to a bank), are to be managed and measured effectively by its management. It also considers developments which have triggered the need for particular monitoring tools – not only in relation to liquidity risks, but also to the rise of conglomerates and consolidated undertakings. It highlights weaknesses in financial supervision – weaknesses which were revealed following the collapses of Barings and Lehman Brothers. As well as attempting to draw comparisons between the recommendations which were made by the Board of Banking Supervision (BoBS) following Barings’ collapse, and the application issues raised by the Basel Committee in its 2009 Consultative Document, International Framework for Liquidity Risk Measurement, Standards and Monitoring, it highlights the links and relevance between both recommendations. In drawing attention to the significance of corporate governance, audit committees, and supervisory boards, the importance of effective communication between management at all levels, to ensure transmission and communication of timely, accurate and complete information, is also highlighted. Through a comparative analysis of two contrasting corporate governance systems, namely, Germany and the UK, it analyses and evaluates how the design of corporate governance systems could influence transparency, disclosure, as well as higher levels of monitoring and accountability. Whilst highlighting the need for, and the growing importance of formal risk assessment models, the paper also emphasises the dangers inherent in formalism – as illustrated by a rules based approach to regulation. It will however, demonstrate that detailed rules could still operate within a system of principles based regulation – whilst enabling a consideration of the substance of the transactions which are involved. In addressing the issues raised by principles based regulation, the extent to which such issues can be resolved, to a large extent, depends on adequate compliance with Basel Core Principle 17 (for effective banking supervision) – and particularly on the implementation, design and compliance with “clear arrangements for delegating authority and responsibility.”

As well as addressing the Basel Committee's proposals to strengthen global capital and liquidity regulations, this paper also considers several reasons why information disclosure should be encouraged. These include the fact that imperfect information is considered to be a cause of market failure which “reduces the maximisation potential of regulatory competition”, and also because disclosure requirements would contribute to the reduction of risks which could be generated when granting reduced capital level rewards to banks who may have poor management systems. Furthermore it draws attention to the need for greater measures aimed at consolidating regulation within (and also extending regulation to) the securities markets – given the fact that „the globalisation of financial markets has made it possible for investors and capital seeking companies to switch to lightly regulated or completely unregulated markets.“

Developments since the introduction of the 1988 Basel Capital Accord have resulted in growing realisation that new forms of risks have emerged and that previously existing and managed forms require further redress. The revised Capital Accord, Basel II, evolved to a form of meta regulation – a type of regulation which involves the risk management of internal risks within firms. The 1988 Basel Accord was adopted as a means of achieving two primary objectives: Firstly, “…to help strengthen the soundness and stability of the international banking system – this being facilitated where international banking organisations were encouraged to supplement their capital positions; and secondly, to mitigate competitive inequalities.” As well as briefly outlining various efforts and measures which have been undertaken and adopted by several bodies in response to the recent Financial Crisis, this paper considers why efforts aimed at developing a new framework, namely, Basel III, have been undertaken and global developments which have promulgated the need for such a framework. Further, it attempts to evaluate the strengths and flaws inherent in the present and future regulatory frameworks by drawing a comparison between Basel II and the enhanced framework which will eventually be referred to as Basel III.

Given the somewhat schizophrenic, and uncertain, approach of the EU authorities to private damages actions in the competition arena, it will likely, in the short- to medium-term anyway, be left to national legal systems in the EU to decide to what extent, if any, they wish to promote collective redress procedures in competition law cases. Robert O’Donoghue, Brick Court Chambers

Firms in Africa report"regulatory and economic policy uncertainty"as a top constraint to their growth. This paper argues that often firms in Africa do not cope with policy rules, rather they face deals: firm-specific policy actions that can be influenced by firm actions (such as bribes) and characteristics (such as political connections). Using Enterprise Surveydata, the paper demonstrates huge variability in reported policy actions across firms notionally facing the same policy. The within-country dispersion in firm-specific policy actions is larger than the cross-national differences in average policy. The analysis shows that variability in this policy implementation uncertainty within location-sector-size cells is correlated with firm growth rates. These measures of implementation variability are more strongly related to lower firm employment growth than are measures of"average"policy action. The paper shows that the de jure measures such as Doing Business indicators are virtually uncorrelated with ex-post firm-level responses, further evidence that deals rather than rules prevail in Africa. Strikingly, the gap between de jure and de facto conditions grows with the formal regulatory burden. The evidence also shows more burdensome processes open up more space for making deals; firms may not incur the official costs of compliance, but they still pay to avoid them. Finally, measures of institutional capacity and better governance are closely associated with perceived consistency in implementation.

The study analyzes the main issues of legal regulation of international intellectual property transactions. The authors review existing civil and customs legislation regulating import, export and use of licensed products on Russia’s territory, the law application practices concerning disputable issues, as well as foreign experience in that field. Some possible solutions to the problems arising in connection with legal regulation of international intellectual property transactions are suggested.

Through a focus on the ever increasing need to address information asymmetries, as well as reference to the uniqueness of the degree to which systemic risks are triggered in banking, this paper aims primarily to highlight reasons why government and central bank intervention are essential and required in financial regulation. The role presently assumed by regulation is not the same as it was thirty years ago. Deregulation and conglomeration have significantly altered the landscape in which regulation previously existed and to an extent, defined the role which it presently assumes. For this reason, arguments which were (and have been) directed against government, central bank intervention, as well as the role of regulation, require re-evaluation. Deposit insurance and lender of last resort arrangements serve to instil confidence in depositors hence contributing towards safeguarding system stability and preventing unnecessary runs where panics occur. Such benefits are not only considered against those arguments advanced by antagonists of deposit insurance and lender of last resort arrangements, but also against those views which do not favour government and central bank intervention. In evaluating whether free banking is equipped with as many mechanisms and safeguards required in safeguarding the stability of the financial system, the urgency for such safety net instruments, which is attributed to the peculiar and unique nature of banking, will be considered. Contrary to the argument [that “if markets are generally better at allocating resources than governments are, then the differences or distinctions which exist between “money” and the industry that provides it (the banking industry) should not serve as bases for an assumption that money and banking are exceptions to the general rule”], it has to be highlighted (for several reasons) that the banking industry could not be equated to other areas of the financial sector. One of such reasons relates to the extent to which the impact of systemic runs differ within the banking sector when compared to other areas such as the securities markets. The differences in the nature of risks which exist in banking and those which exist within the securities markets, constitutes another reason why the need for government and central bank intervention is advocated. Furthermore, even though the nature of banking risks warrants government and central bank intervention – as well as capital adequacy regulation, capital regulation should also be extended to the securities markets for many reasons – one of which is the ability to securitise assets. If there was no longer a role for regulation, then re- regulation should not have occurred in certain jurisdictions which have adopted and successfully implemented consolidated supervision.

This paper is primarily aimed at highlighting the role and significance of asymmetric information in contributing to financial contagion. Furthermore, in emphasising the importance of greater disclosure requirements and the need for the disclosure of information relating to “close links”, such disclosure being considered vital in assisting the regulator in identifying potential sources of material risks, it illustrates the fact that incentives (such as the reduction in the levels of capital to be retained by institutions), which have the potential to facilitate market based regulation (through non binding regulations), may not necessarily serve as suitable means in the realisation of some of Basel II’s objectives – namely the achievement of “prudentially sound, incentive-compatible and risk sensitive capital requirements”. The paper also attempts to raise the awareness that the operation of risk mitigants does not justify a reduction in the capital levels to be retained by banks – since banks operating with risk mitigants could still be considered inefficient operators of their management information systems (MIS), internal control systems, and risk management processes. The fact that banks possess risk mitigants does not necessarily imply that they are complying with Basel Core Principles for effective supervision (particularly Core Principles 7 and 17) – as the paper will seek to demonstrate. Core Principle 7 not only stipulates that “banks and banking groups satisfy supervisory requirements of a comprehensive management process, ensure that this identifies, evaluates, monitors and controls or mitigates all material risks and assesses their overall capital adequacy in relation to their risk profile, but that such processes correspond to the size and complexity of the institution.” Certain incentives which assume the form of capital reductions are considered by the Basel Committee to “impose minimum operational standards in recognition that poor management of operational risks (including legal risks) could render such risk mitigants of effectively little or no value and that although partial mitigation is rewarded, banks will be required to hold capital against residual risks”. Information disclosure should be encouraged for several reasons, amongst which include the fact that imperfect information is considered to be a cause of market failure – which “reduces the maximisation potential of regulatory competition”, and also because disclosure requirements would contribute to the reduction of risks which could be generated when granting reduced capital level rewards to banks who may have poor management systems.

Around the globe countries are attempting to forge ahead with the expansion and upgrading of advanced communications networks. In most cases they are setting very ambitious goals with regard to technology and coverage. However, the specific cost structure for broadband projects results in the private-sector-driven, competitive market for network upgrading being primarily focused on densely populated urban areas. By contrast, major progress in rolling out broadband to unserved rural areas will not be made in the foreseeable future without state subsidies. Without having to steer a course towards the return of a monopoly in the telecommunications sector, which would have a detrimental long-term impact, the public sector can in this situation promote sustainable progress in telecommunication by merging projects, entering into risk-sharing partnerships, setting realistic broadband targets, providing essential market information to market participants, offering e-government digital services itself and, on top of that, further enhancing investment incentives with a regulatory framework in a competitive environment.

Paper presented at "Strategies For Solving Global Crises Conference: The Financial Crisis and Beyond" (October 2009). Also published in "Corporate Finance: Governance, Corporate Control & Organization Journals" (July 2010) The Financial Crisis has not only highlighted the importance of addressing issues such as liquidity risk – it has also brought to the fore the need to focus on unregulated instruments such as hedge funds, which are of systemic importance to the financial industry. Risk is an area which, owing to its increasing significance, requires greater focus. A move to risk based strategies is evidenced by the growing popularity of risk based regulation and meta regulatory strategies. Given the presence of an unregulated hedge fund industry however, such attempts do not suffice on their own. Further, the systemic nature of risk exacerbates the problem of such unregulated institutions. This paper aims to address complexities and challenges faced by regulators in identifying and assessing risk, problems arising from different perceptions of risk, and solutions aimed at countering problems of risk regulation. It will approach these issues through an assessment of explanations put forward to justify the growing importance of risks, well known risk theories such as cultural theory, risk society theory and governmentality theory. These theories will be considered against a background of themes such as dynamism, evolutionism, developments in science and industry, cultural attitudes to risk, and the need to be responsive and reflexive to changes which have arisen in modern society. Theoretical models and hybrids of a responsive model of regulation such as Enforced self regulation and meta regulation, which have the potential to address the problems relating to risk will be addressed. By virtue of the pro cyclical nature of risk, the inability of Basel 2 to address risk cycles were revealed during the Northern Rock Crisis. Other flaws and deficiencies inherent in Basel 2, a form of meta regulation, will be highlighted. The relevance of internal control systems to an efficient system of regulation, the reasons for which meta regulation is not only considered to be the most responsive form of regulation, but also one which assigns central role to internal control systems will be discussed. The contested nature of risk and the difficulties attributed to its quantification, raise questions about its ability to function effectively as a regulatory tool. If risks could be eliminated in their entirety however, then regulation would serve no purpose. This paper aims generally therefore to direct attention to those areas which could be addressed, namely institutional risks, and measures whereby such risks, even though impossible to eliminate, could be minimized.

Class certification proceedings were never intended to be used to decide the merits of an underlying factual dispute in the lawsuitâ۠be it discrimination felt by class members in common, or impact from a price-fixing violation on a class of purchasers generally. Jay L. Himes & William V. Reiss, Labaton & Sucharow

The issue of appropriate corporate governance framework has been a focal point of recent reforms in many countries. This study provides a comprehensive comparative analysis of corporate governance regulatory systems and their evolution over the last 15 years in 30 European countries and the US. It proposes a methodology to create detailed corporate governance indices which capture the major features of capital market laws in the analysed countries. The indices indicate how the law in each country addresses various potential agency conflicts between corporate constituencies: namely, between shareholder and managers, between majority and minority shareholders, and between shareholders and bondholders. The analysis of regulatory provisions within the suggested framework enables us to understand better how corporate law works in a particular country and which strategies regulators adopt to achieve their goals. The 15-year time series of constructed indices and large country-coverage (30 European countries and the US) also allows us to draw conclusions about the convergence of corporate governance regimes across the countries. To our best knowledge, this is the first study that intends to address the convergence debate empirically. The analysis is based on a unique corporate governance database that comprises the main changes in corporate governance regulations in the US and all European countries between 1990-2005.

Because Dukes lowers the bar to class certification in the Ninth Circuit, businesses that may be targeted by antitrust class actions should be prepared to face more litigation there, and should be sure to preserve important issues for potential Supreme Court review. Donald M. Falk, Archis A. Parasharami, & Marcia E. Goodman, Mayer Brown

This is the story, in Justice Ginsburg’s words, of an “attempt to transform a $500 case into a $5,000,000 award." Aidan Synnott, Paul, Weiss & Daniel Crane, Univ. of Michigan

This analysis of several early cases brought under the AML shows that civil litigation is already beginning to impact business behavior. Lester Ross (WilmerHale)

To be efficient, flexible labor markets require geographically mobile workers. Otherwise firms can take advantage of workers' immobility and extract rents at their expense. In cultures with strong family ties, moving away from home is costly. Thus, to limit the rents of firms and to avoid moving, individuals with strong family ties rationally choose regulated labor markets, even though regulation generates higher unemployment and lower incomes. Empirically, we find that individuals who inherit stronger family ties are less mobile, have lower wages and higher unemployment, and support more stringent labor market regulations. We find a positive association between labor market rigidities at the beginning of the 21st century and family values prevailing before World War II, and between family structures in the Middle Ages and current desire for labor market regulation. Both results suggest that labor market regulations have deep cultural roots. NBER Working Paper Series - number 15747

International taxation rules for multi- national enterprises (MNEs) prescribe that international prices for goods and services between different subsidiaries – and therefore incomes of these subsidiaries - must be comparable to those set between independent international firms for the purpose of taxation. These rules also prescribe that risk should be accounted for in pricing and income. Since current practice of price comparisons does not yet fully allow accounting for risk, prices and in turn earnings and taxation may be distorted. We analyze a panel of about 160,000 European manufacturing, wholesale and retail trade firms for the years 1992 to 2007 in order to establish to what extent earnings do take risk into account. Risk measured by earnings volatility emerges as one major determinant of income. When earnings are set in relation to invested capital, risk emerges as the only stable determinant of income. Results indicate that both MNEs and independent firms regularly account for risk as a major determinant of income when pricing international goods and services.

As well as providing an analysis of how financial stability could be sustained through the appropriate targeting of policy instruments at debt gearing, this paper aims to provide an overview of the respective roles which governments and shareholders could assume in deterring financial institutions from overly relying on certain policy measures (role of governments) and in reducing tax burdens on tax payers (role of shareholders). The duration of the recent Crisis has also witnessed the introduction of mechanisms aimed at bailing- in financial institutions – rather than merely bailing them out. Even though monetary policy measures should ultimately be targeted at macro level, the respective roles assumed by governments and shareholders at micro level in facilitating the phasing out of certain monetary policy measures and assuming responsibility as the first resort during the impending collapse of a financial institution, are also of vital importance. This paper also aims to consider additional measures which could be implemented as a means of mitigating the number of financial instititions which could become overly dependent on monetary policy and liquidity sustenance measures provided during deteriorating financial conditions. Greater focus on strategies aimed at mitigating the number of financial institutions which could become overly dependent (bail-in strategies which could address bail outs) – rather than simply focussing on measures and exit strategies aimed at weaning such institutions after assistance has been granted to these financial institutions, could prove to be more effective. A brief comparative analysis of the monetary policy response implemented in the Euro area during the recent Financial Crisis (against that which was implemented in the United States), will also be provided in this paper.

Based on the argument that the benefits conferred through the provision of non audit services by audit firms outweigh the attributed costs of safeguarding the auditor's independence, this paper will not only seek to justify this argument, advance proposals which do not favour an outright prohibition of the provision of non audit services, but also consider means through which non audit services could be regulated in order to facilitate competition in the audit market. At the same time it will consider various legislation which have been introduced in recent years and which are aimed at facilitating greater disclosure of information – hence improving transparency within the audit and financial markets. “Specific measures,” it is contended, “would involve not only the introduction of new standards (for example – the disclosure of client concentration) but also the elimination of current restrictions“. Different types of safeguards which exist in order “to mitigate or eliminate threats” to the auditor’s independence, as a result of the provision of non audit services, will be considered against the regulator’s aim to facilitate competition, enhance disclosure and promote other practices which would advance the regulator’s endeavour to be more “market friendly”. The consultation on control structures in audit firms and their consequences on the audit market, a consultation which was launched by the European Commission as part of its efforts to create more market players, could be regarded as a response to such proposals to facilitate a more “market friendly” environment and also to concerns that the financial market is already over regulated. Some of the possible ways advanced by the Commission as channels for facilitating greater entry into the international market include the deregulation of the capitalisation of audit firms as a catalyst for facilitating greater entry into the audit market. Deregulation of the capital structure in this sense is considered to be a “modification of Article 3 (4) of the 2006 Directive on Statutory Audit which should however not be to the detriment of robust independence rules.”

PurposeThe purpose of this paper is not only seek to trace developments that have contributed to the importance of risk in regulation, but also to justify why risk has become so significant within regulatory and governmental circles.Design/methodology/approachThis task will be facilitated through a consideration of theories associated with risk, and by reference to two forms of risk regulation, namely risk‐based regulation and meta regulation. As well as a consideration of the application of both in jurisdictions such as the UK, the paper adopts a comparative approach through references to the their application in jurisdictions such as Germany, Italy, and the USA, and also through a comparison between meta‐regulatory strategies and risk‐based regulation.FindingsThis paper concludes that all regulatory strategies should take into consideration the importance of management responsibilities – both on individual and corporate levels. Meta‐risk regulation has not only assumed such a prominent position in regulation through its application in Basel II, but also is preferred to risk‐based regulation – not only because of the element of ambiguity which risk‐based regulation introduces into its assessment (through a consideration of the external environment of the firm), but also because of its impact of the use of external auditors in regulation and supervision.Practical implicationsThe practical implications of a move towards risk‐based regulatory strategies, and meta‐regulatory strategies in particular, is that courts are simply not adequately equipped to deal with the pace with which some financial instruments, such as derivatives, operate.Originality/valueThis paper not only introduces originality through its comparative approach and the choice of jurisdictions involved, but also through the attention it draws to the need for more innovative techniques such as meta regulation. Meta regulation can be considered to be the most evolved and collaborative form of regulation, which is best suited for such an ever‐evolving and changing regulatory environment that currently exists.

This paper presents a rational expectations model of optimal executive compensation in a setting where managers are in a position to manipulate short-term stock prices, and managers' propensity to manipulate is uncertain. Stock-based incentives elicit not only productive effort, but also costly information manipulation. We analyze the tradeoffs involved in conditioning pay on long- versus short-term performance and characterize a second-best optimal compensation scheme. The paper shows manipulation, and investors' uncertainty about it, affects the equilibrium pay contract and the informational efficiency of asset prices. The paper derives a range of new cross-sectional comparative static results and sheds light on corporate governance regulations.

Due to imperfect transparency and costly auditing, trust is an essential component of financial intermediation. In this paper we study a sample of 444 due diligence (DD) reports from a major hedge fund DD firm. A routine feature of due diligence is an assessment of integrity. We find that misrepresentation about past legal and regulatory problems is frequent (21%), as is incorrect or unverifiable representations about other topics (28%). Misrepresentation, the failure to use a major auditing firm, and the use of internal pricing are significantly related to legal and regulatory problems, indices of operational risk. We find that DD reports are typically performed after positive performance and investor inflows. We control for potential bias due to this and other potential conditioning. An operational risk score based on information contained in the DD reports significantly predicts subsequent fund failure and statistical performance characteristics out of sample. Finally we find that observed operational risk characteristics do not appear to moderate fund flow.

For several decades now a debate has raged about policy-making by litigation. Spurred by the way in which tobacco, environmental, and other litigation has functioned as an alternative form of regulation, the debate asks whether policy-making or regulation by litigation is more or less socially desirable than more traditional policy-making by ex ante rule-making by legislatures or administrative agencies. In this paper we step into this debate, but not to come down on one side or another, all things considered. Rather, we seek to show that any form of regulation that is dominated by high-salience particular cases is highly likely, to make necessarily general policy on the basis of unwarranted assumptions about the typicality of one or a few high-salience cases or events. Two cornerstone concepts of behavioral decision - the availability heuristic and related problems of representativeness - explain this bias. This problem is virtually inevitable in regulation by litigation, yet it is commonly found as well in ex ante rule-making, because such rule-making increasingly takes place in the wake of, and dominated by, particularly notorious and often unrepresentative outlier events. In weighing the net advantages of regulation by ex ante rule-making against those of regulation by litigation, society must recognize that any regulatory form is less effective insofar as it is unable to transcend the distorting effect of high-salience unrepresentative examples.

We examine empirically whether the size of a firm using a network affects the scope of its network usage, and consequently network effects and lock-in within the network. We use the example of hospital information exchange. We find that hospitals in larger hospital systems are more likely to exchange electronic patient information only within their system and less likely to exchange patient information externally. We show that hospitals are also more likely to exchange information externally if others hospitals also do so. This implies that the disinclination of large hospital systems to exchange data externally harms overall levels of network use. Our results highlight that makers of technology policy designed to encourage the optimal use of networks should consider regulating the behavior of network users as well as technology vendors.

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. Finally the paper will propose criteria which should determine whether or not executives should be compensated, as well as consolidate on why (compensation) incentives should be aimed at generating improved long term performance and results rather than a focus on short term performance and results.

Resume Le capitalisme financier est entre dans une crise profonde en 2007. Cette crise, d’abord bancaire et localisee dans le marche du credit immobilier americain, est rapidement devenu mondiale, financiere et reelle. Elle a remis en cause la forte croissance dont beneficiait l’economie mondiale depuis 1995. L’article decrit l’ampleur de la globalisation financiere et les desequilibres qu’elle a generes. La crise s’explique d’abord par des desequilibres macroeconomiques. C’est une crise des strategies nationales de pression sur les salaires, qu’elles soient compensees par des gains de competitivite (Chine, Allemagne) ou par le developpement de la financiarisation, qui permet d’impulser la consommation des menages, grâce a la bulle financiere et par l’endettement (comme dans les pays anglo-saxons). La globalisation financiere permet l’accumulation de desequilibres qui finissent par exploser (comme le montre la polarisation des soldes exterieurs) ; elle se caracterise par l’instabilite des marches (comme l’illustre le cas du marche des changes). La crise s’explique ensuite par l’hypertrophie du secteur financier, l’avidite des detenteurs de capitaux et l’aventurisme des institutions financieres. De masses enormes de capitaux sont a la recherche d’une rentabilite maximale ; les gestionnaires ne peuvent l’assurer que temporairement par la creation de bulles financieres qui s’effondrent periodiquement. La crise de 2007-2008 apparait comme un revelateur : elle montre la faillite des mathematiques financieres qui etaient censees permettre d’optimiser les rentabilites, de reduire et de distribuer les risques. Elle met en evidence la strategie aventureuse des banques qui contournaient les ratios prudentiels et intervenaient massivement sur les marches financiers. L’article se conclut par une discussion critique des projets de reformes du fonctionnement de l’economie mondiale, en particulier ceux que les sommets du G20 ont esquisses. Ceux-ci devraient concerner tant les strategies macroeconomiques nationales que la gouvernance de l’economie mondiale et celles des banques et des marches financiers.

This paper will consider whether the scope of financial regulation should be extended and if so, ways in which this could occur. In order to carry out these tasks, it will not only address problems identified from the recent crises and Basel 2, gaps which exist in some of the responses to these issues, but will also consider what roles other parties such as central banks and external auditors can play in achieving financial objectives. To a certain extent, it will address these issues by making references to proposals which have been put forward from different sources. It will introduce the points of discussion through an overview of global developments which have necessitated the need for a review of financial regulation and through a review of the present regulatory objectives.

This paper considers developments which have necessitated greater involvement and a greater role for the central bank in financial regulation and supervision. The aftermath of the 2007/08 financial crisis has witnessed the enactment of legislation such as the Banking Act of 2009 which has not only introduced greater statutory powers for the central bank, but also the Special Resolution Regime. As well as a consideration of arguments which are in favour of the central bank’s role as supervisor and lender of last resort, the importance of central bank independence and safeguards which exist to ensure that sufficient accountability is fostered, will be considered. Safeguards and accountability mechanisms which are adequate, such that, whilst ensuring that the regulator is not susceptible to regulatory capture, do not impede the ability of such a regulator to obtain vital and necessary information from systemically important individual financial institutions. In its support of the view that central banks should assume a greater role in supervision, this paper not only seeks to justify why such a degree of involvement is vital to ensuring and maintaining stability in the financial system, but also those factors which are considered to be necessary if such a role is to be effective.

En este trabajo, a partir de un marco tributario que considera tanto los objetivos de la política tributaria de un país como sus efectos, se analizan los distintos impuestos que afectan al mercado de capitales en Chile. Dicho análisis junto a una exhaustiva revisión de la literatura económica en este tema, tanto teórica como empírica, permite plantear un conjunto de propuestas que permitirían reducir las potenciales distorsiones que introducen los impuestos en el mercado de valores en Chile actualmente y harían más eficiente su funcionamiento

This paper considers the responses of six audit firms, to the four options presented by the European Commission in reforming auditors’ liability. Whilst agreeing with a limitation in audit firms’ liability, it does not consider the means of limitation, as provided by the European Commission in its Recommendation, to be the best means of limiting auditors’ liability. In proposing a means whereby not only a limitation of audit firms’ liability can be achieved, but also one which would serve as a better means of facilitating harmonisation, the paper makes reference to the variants presented in the author’s paper “Proposals For a New Audit Liability Regime”, namely a combination of the first and third options. Further, the wide scope permitted by the Commission in leaving it to Member States to decide upon the appropriate method for limiting liability and the means of limiting liability, as the paper will seek to illustrate, do not present the best opportunities in realising the goal of harmonisation.

This paper studies the regulatory issues related to the “Sovereign Wealth Funds†(SWFs), described as “special purpose†government investment vehicles. Concerns have been expressed due to SWFs limited disclosure and transparency and their multiple investment objectives. While the risk of a political/strategic bias should not be underestimated, this paper argues that at present a specific regulation of SWFs may not be needed, as their asset management is already constrained by many regulatory, economic and political factors. With specific reference to legal aspects, this paper proposes that a balanced and proportionate regulatory approach to SWFs issues may just require, for the time being, to complement “soft law†instruments with a “light†and “indirect†regulatory and supervisory framework for SWFs equity investments.

This paper traces the developments that have contributed to the importance of risk in regulation. Not only does it consider theories associated with risk, it also discusses explanations as to why risk has become so important within regulatory and governmental circles. Two forms of risk regulation, namely risk based regulation and meta regulation are considered. As well as considering the application of both in jurisdictions such as the UK, the paper places greater focus in discussing the importance of meta regulation in jurisdictions such as Germany, Italy and the US. The preference for meta regulation is based on the premises, not only of the advantages considered in this paper but also on the application of Basel 11 in several jurisdictions. Whilst meta regulation also has its disadvantages, the impact of risk based regulation on the use of external auditors plays a part in the preference for meta regulation.

We compare the influence of bankruptcy law on the risk of default and the rate of liquidation by banks. We show that it depends on whether it is pro-creditors or pro-debtors oriented, and on the intensity of competition between banks. Then , we analyse the various tools at the disposal of public authority in order to accomdate the transition from a pro-creditors regime to a pro-debtors one. In a sense, our results suggest that there may exist a kind of consistency between the aims assigned to law, the orientation of bankruptcy law and the level of competition in the banking system.

This paper not only considers the regulatory challenges faced by regulators, but also the potential of responsive regulation and particularly meta regulation to address these challenges. It explores developments which have necessitated a change from the traditional form of regulation, that is, command and control regulation to more responsive hybrids of regulation. Even though traditional regulation has its advantages, its inability to address the demands of changing business environments has resulted in the adoption of more flexible forms of regulation such as risk based regulation and responsive regulation. Whilst the potential of responsive regulation is considered, the complexities and challenges faced by the regulator in identifying and assessing risk, solutions aimed at countering problems of risk regulation, along with the problems arising from different perceptions of risk will be addressed only briefly.

It is widely believed that disclosure quality improves investors’ welfare by reducing cost of capital in a competitive market. This paper examines this conventional wisdom by studying a production economy in which disclosure influences a firm’s investment decisions. I demonstrate three points. First, cost of capital could increase with disclosure quality when new investment is sufficiently elastic. Second, there are plausible conditions under which disclosure quality reduces the welfare of current and/or new investors. Finally, cost of capital is not a sufficient statistic for the effects of disclosure quality on the welfare of either current or new investors. These results may help interpret the mixed empirical findings on the relation between disclosure quality and cost of capital, inform the empirical efforts to measure the economic consequences of accounting disclosure, and add to the ongoing debate on the reform of financial reporting and disclosure regulation.

Also published in "Regulation of Financial Institutions Journal CMBO" (December 2009). From the responses received from the European Commission’s consultation on control structures in audit firms and their consequences on the audit market, a consultation which was launched in November 2008, and whose deadline was scheduled for the end of February 2009, the role played by the facilitation of greater access to external financial capital as a means of increasing access to the audit market, hence opening up the market for the audit of international companies to more suppliers, and encouraging new market players, was acknowledged. However, this factor on its own, coupled with the need to amend current rules on the control of audit firms, namely through a relaxation of the rules – beyond that which is currently permitted under Article 3 of the 2006 Statutory Audit Directive, was not considered to be the most important source of impediment to the emergence of new players. Other further possible catalysts, both on the supply side (namely auditors) and the demand side (companies), were also considered vital to efforts aimed at encouraging more players in gaining access to the international audit market. This paper will focus on greater access to external financial capital - as a means of lowering barriers to the international audit market. In arriving at the conclusion that the benefits associated with the external investor model outweigh the possible risks it generates, the paper not only considers theories on managerial behaviour and ownership structure, but also gives attention to the safeguards for audit independence as listed under the 2002 Statutory Auditors’ Independence in the EU: A Set of Fundamental Principles, and the 2006 Statutory Audit Directive. It will also consider why, in view of the limitations and restrictions placed on audit firms, with particular reference to the Sarbanes Oxley Act of 2002, actions aimed at encouraging new market players at EU level, whilst ensuring that auditors’ independence and audit quality are not compromised, would also require a consideration of an international dimension of issues involved in lowering barriers to entry.

This paper investigates the consequences of receiving sexual favors or other services as an alternative form of bribery. It infers how these non-monetary payments are made by analyzing the relative effciency of sex bribes and the bargaining power of agents. By assumption, sex payments are less e¢ cient and harder to detect monetary payments. If the Receiver has a sufficiently high (low) utility for consuming sex, then only sex (money) bribes are feasible. In intermediate cases, sexual bribery is offered if and only if the relative bargaining power of the Receiver is sufficiently small compared to that of the Corruptor.

This paper not only considers the regulatory challenges faced by regulators, but also the potential of responsive regulation and particularly meta regulation to address these challenges. It explores developments which have necessitated a change from the traditional form of regulation, that is, command and control regulation to more responsive hybrids of regulation. Even though traditional regulation has its advantages, its inability to address the demands of changing business environments has resulted in the adoption of more flexible forms of regulation such as risk based regulation and responsive regulation. Whilst the potential of responsive regulation is considered, the complexities and challenges faced by the regulator in identifying and assessing risk, solutions aimed at countering problems of risk regulation, along with the problems arising from different perceptions of risk will be addressed only briefly.

In a cross-section of countries, government regulation is strongly negatively correlated with social capital. We document this correlation, and present a model explaining it. In the model, distrust creates public demand for regulation, while regulation in turn discourages social capital accumulation, leading to multiple equilibria. A key implication of the model is that individuals in low trust countries want more government intervention even though the government is corrupt. We test this and other implications of the model using country- and individual-level data on social capital and beliefs about government’s role, as well as on changes in beliefs and in trust during the transition from socialism.

In a cross-section of countries, government regulation is strongly negatively correlated with social capital. We document this correlation, and present a model explaining it. In the model, distrust creates public demand for regulation, while regulation in turn discourages social capital accumulation, leading to multiple equilibria. A key implication of the model is that individuals in low trust countries want more government intervention even though the government is corrupt. We test this and other implications of the model using country- and individual-level data on social capital and beliefs about government's role, as well as on changes in beliefs and in trust during the transition from socialism.

This paper considers the need for a more pro active approach which facilitates greater on site work being carried out by supervisors – as highlighted in the Legal and General Case. It also considers the recommendations made to the UK’s regulator - the FSA, and in particular to the FSA Board, following the Legal and General Case. The recommendations are compared to the Basel Committee’s Core Principles for Effective Banking Supervision. In drawing a comparison, the importance of independent verification of work carried out by external auditors, be it through on-site examinations or the use of external experts, is once again emphasised. The involvement of external auditors or other experts in the supervisory process should not relieve a regulator from on site supervisory responsibilities. As vital as an external auditor’s work is, it is also important to verify such work.

L e capitalisme financier est entré dans une crise profonde en 2007. Cette crise, d’abord bancaire et localisée dans le marché du crédit immobilier américain, est rapidement devenue mondiale, financière et réelle. Elle a remis en cause la forte croissance dont bénéficiait l’économie mondiale depuis 1995. Elle marque un coup d’arrêt à la globalisation financière : l’économie mondiale était dominée par les marchés financiers qui brassaient des masses énormes de capitaux à la recherche d’une forte rentabilité. Leur jeu déterminait les taux de change, les taux d’intérêt, les conditions de financement des entreprises et des ménages. Les entreprises devaient n’avoir d’autre objectif que de maximiser leur valeur actionnariale. Les nations étaient obligées de se concurrencer pour attirer les capitaux et les firmes multinationales. Elles devaient mettre en œuvre des réformes structurelles pour se conformer au modèle libéral d’économie totalement déréglementée. Le libre jeu des firmes multinationales et des institutions financières, l’ouverture commerciale et financière des économies semblaient rendre inutile la gouvernance de l’économie mondiale par les États ou des internationales

Starting from the observation that at the multilateral level shareholder activism is considered as an important aspect of good corporate governance, this paper examines several legal and economic obstacles to institutional investor activism in the EU and in the US. We also examine the voting record of 76 institutional investors in the US and of several others in the EU. We find that US investors seem to have easier access to proxy voting than in the EU (although recent EU legislation should remove several of the present legal obstacles); that conflicts of interest seem to limit the activism of several categories of institutional investors both in the US and in the EU; that some national legislations limit the ability of institutional investors to coordinate their voting policies; and that recourse to stock lending and other forms of separation of financial risk from voting rights seems to be practiced more by controlling shareholders at the expense of institutional investors than the opposite. We also find that institutional investors in the US seem to have a more adversarial voting pattern vis-à-vis company managements than in the UK; this might be due to the fewer voting rights given to shareholders by the US regulatory framework. As for Europe, institutional investors' voting pattern is by far the most adversarial in France, where there is a high incidence of control-enhancing mechanisms. Institutional investors seem to have an adversarial voting stance also in Greece, Belgium and Sweden, where control-enhancing mechanisms are also present, while in Italy they tend to have a low voting turnout. More in general, EU investors’ voting pattern seems to be sensitive to the presence of control-enhancing mechanisms, ownership concentration, and to the origin of the national legal system.

According to public interest theory, professional licensing solves the lemon problem generated by asymmetric information. In contrast, capture theory claims that licensing aims at increasing professional salaries by restricting supply. This paper shows that the two theories can be identified using data from one regulated profession and provides an empirical application to the US market for lawyers. The results imply that lawyers' salaries have a large weight relative to social welfare in the objective function of licensing boards.

This paper addresses factors which have prompted the need for further revision of banking regulation, with particular reference to the Capital Requirements Directive. The Capital Requirements Directive (CRD), which comprises the 2006/48/EC Directive on the taking up and pursuit of the business of credit institutions and the 2006/49/EC Directive on the capital adequacy of investment firms and credit institutions, implemented the revised framework for the International Convergence of Capital Measurement and Capital Standards (Basel II) within EU member states. Pro cyclicality has attracted a lot of attention – particularly with regards to the recent financial crisis, owing to concerns arising from increased sensitivity to credit risk under Basel II. This paper not only considers whether such concerns are well-founded, but also the beneficial and not so beneficial consequences emanating from Basel II’s increased sensitivity to credit risk (as illustrated by the Internal Ratings Based approaches). In so doing it considers the effects of Pillar 2 of Basel II, namely, supervisory review, with particular reference to buffer levels, and whether banks’ actual capital ratios can be expected to correspond with Basel capital requirements given the fact that they are expected to hold certain capital buffers under Pillar 2. Furthermore, it considers how regulators can respond to prevent systemic risks to the financial system during periods when firms which are highly leveraged become reluctant to lend. In deciding to cut back on lending activities, are the decisions of such firms justified in situations where such firms’ credit risk models are extremely and unduly sensitive - hence the level of capital being retained is actually much higher than minimum regulatory Basel capital requirements ?

In 1822, New York became the first common-law state to authorize the formation of limited partnerships, and over the ensuing decades, many other states followed. Most prior research has suggested that these statutes were utilized only rarely, but little is known about their effects. Using newly collected data, this paper analyzes the use of the limited partnership in nineteenth-century New York City. We find that the limited partnership form was adopted by a surprising number of firms, and that limited partnerships had more capital, failed at lower rates, and were less likely to be formed on the basis of kinship ties, compared to ordinary partnerships. The latter differences were not simply due to selection: even though the merchants who invested in limited partnerships were a wealthy and successful elite, their own ordinary partnerships were quite different from their limited partnerships. The results suggest that the limited partnership facilitated investments outside kinship networks, and into the hands of talented young merchants.