Notes on Mishkin Chapter 8 (Econ 353, Tesfatsion) (2024)

Notes on Mishkin Chapter 8
("Economic Analysis of Financial Structure")
Econ 353: Money, Banking, and Financial Institutions

Last Updated: 24 April 2024

Latest Course Offering: Spring 2011

Course Instructor:

Professor Leigh Tesfatsion

tesfatsi AT iastate.edu

Econ 353 Home Page:

https://faculty.sites.iastate.edu/tesfatsi/archive/econ353/tesfatsion/

1. Eight Puzzles Concerning Financial Structure
2. Transactions Costs in Relation to Puzzle 3
3. Asymmetric Information Problems Revisited
   1. Adverse Selection in Financial Markets
   2. Moral Hazard in Financial Markets
4. Adverse Selection in Relation to Puzzles 1-7
5. Moral Hazard in Relation to Puzzles 1-5 and 7-8
6. Conflict of Interest Issues
7. Basic Concepts and Key Issues for Mishkin Chapter 8

Eight Puzzles Concerning Financial Structure

This section summarizes eight puzzles regarding real-world financial structure stressed by Mishkin. The remaining four sections discuss possible resolutions for these puzzles based on an understanding of how transaction costs and information costs affect financial structure.

The financial structure of a business refers to the manner in which the business finances its activities using external funds, i.e., funds obtained from outside the business. There are two important aspects to this financial structure:

• the mix of external funds between equity and debt;
• the source of external funds, either financialintermediaries or securities markets.

Mishkin provides a figure (Figure 1) that shows the mix andsource of external funds for nonfinancial businesses in the United States and other countries during the period 1970-2000.

Regarding mix, note that various forms of debt instruments (loans and bonds) accounted for about 89 percent of the external funds whereas equity instruments (stocks) only accounted for about 11 percent of these external funds.

Regarding source, note that loans provided by financial intermediaries accounted for about 57 percent of these external funds while sales of securities (bonds and stocks) accounted for about 43 percent of these external funds.

Mishkin uses the data in this figure as evidence in support of eight "puzzles" regarding financial structures all over the world, as follows.

• 1. Stocks are not the most important source of external financing forbusinesses.

  As seen in Figure 1, the stock market accounted for a relatively small fraction of external financing by U.S. corporations in the depicted period.

  Puzzle: Why is the stock market less important than other sources of financing in the United States and other countries?

• 2. Issuing marketable securities (whether debt or equity) is not the primary way in which businesses finance their operations.

  As seen in Figure 1, bonds were a far more important source of financing than stocks in the United States during the depicted period 1970-2000 Nevertheless, bonds and stocks together supplied less than a third of the total external funds acquired by U.S. corporations to finance their activities during this period. As seen in Figure 1, this is true elsewhere in the world as well.

  Puzzle: Why don't businesses make more extensive use of debt andequity security issues to finance their activities?

• 3. Indirect finance, which involves the activities of financialintermediaries, is more important than direct finance, in whichbusinesses raise funds directly from lenders in securities markets.

  Puzzle: Why are financial intermediaries and indirect finance soimportant in financial markets?

• 4. Financial intermediaries, particularly banks, are the most important source of external funds used to financebusiness.

  As Mishkin notes, in an average year in the United States,more than four times more funds are raised with loans than with stocks,and loans are even more important in other countries of the world -- inGermany and Japan, for example.

  Puzzle: What makes banks so important to the workings of the financialsystem?

• 5. The financial system is one of the most heavily regulated sectors of theeconomy.

  As studied in Chapter 2, governments regulate financial markets primarily to promote the provision of information and to ensure the soundness of the financial system. This regulation is extensive in the United States and in all other highly industrialized economies.

  Puzzle: Why are financial markets so extensively regulatedthroughout the world?

• 6. Only large, well-established corporations have access to securities markets to finance their activities.

  As Mishkin notes, individuals and smaller businesses that are not well established rely heavily on banks for external funds; only rarely do they attempt to obtain external funds through bond and stock issue.

  Puzzle: Why do only large, well-known corporations have the ability to raise funds in securities markets?

• 7. Collateral is a prevalent feature of debt contracts for bothhouseholds and businesses.

  Collateral is an asset owned by a borrower that is pledged to the lender in the event the borrower defaults on the loan, i.e., in the event the borrower is unable to meet his debt payment obligations to the lender. For example, when a borrower receives a real estate loan from a bank to finance construction of a house, the collateral is usually the house itself. Ownership of the house reverts to the bank if the borrower defaults on the loan.

  Debt contracts between a borrower and lender that involve the use of some kind of collateral to guarantee the loan are referred to as collateralized debt (or secured debt). Debt that is not secured by collateral -- for example, credit card debt -- is referred to as unsecured debt. As Mishkin notes, the majority of household debt in the United States consists of collateralized loans; and borrowing by nonfinancial businesses frequently involves some form of collateral as well.

  Puzzle: Why is collateral such an important feature of debtcontracts?

• 8. Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower.

  Throughout the world, debt contracts typically take the form of lengthy legal documents with extensive restrictive covenants, i.e., provisions restricting the behavior of the borrower. For example, a borrower receiving a real estate loan may be required to carry liability insurance covering accidents at his construction site.

  Puzzle: Why are debt contracts so complex and restrictive?

As Mishkin notes, the explanations for these eight puzzlesregarding real-world financial structuring can in large part be traced to transaction and information costs inherent in financial market activity.

The concept of "transaction costs" is actually quite tricky to define in a manner that is both clear and useful. Roughly speaking, transaction costs are the costs associated with the organization of productive activities, such as the costs arising from the need to search for customers and to prepare contracts for longer-term customer-supplier relationships. In contrast, production costs are the costs arising from the need to pay for direct inputs to production, such as salaries (the price of labor services) and rental payments (the price of capital services generated by rented capital equipment).

The concept of "information costs" is more straightforward.Information costs are the costs incurred when attempts are made to reduce moral hazard and adverse selection problems arising from conditions of asymmetric information.

For example, a debt contract is intended to be a productive activity in the sense that a contractually determined amount of loaned funds (input) is used by a borrower to produce a stream of returns (output) that is expected to cover debt payment obligations (input costs) while leaving some positive net return (profit) for the borrower.

A debt contract entails two distinct types of transaction costs: (a) the organizational costs associated with finding and bringing together the borrower and lender; and (b) the organizational costs associated with the actual writing up and signing of the debt contract. In addition, a debt contract typically involves information costs in that the behavior of the borrower must be monitored in an attempt to ensure that the borrower meets the terms of the debt contract as specified in its payment schedule and restrictive covenants.

The next two sections discuss more carefully how transaction costs and information costs affect the financial structure of businesses in ways that help to explain the above eight listed puzzles. In particular, Mishkin argues that a consideration of transaction costs is particularly helpful for understanding puzzle 3, whereas a consideration of information costs helps to explain all eight puzzles.

Transaction Costs in Relation to Puzzle 3

Recall puzzle 3: "Why are financial intermediaries and indirect finance so important in financial markets?"

As previously seen (puzzle 1), businesses in the United States and other countries rely much more heavily on debt financing than on equity financing. Puzzle 3 concerns why financial intermediaries (primary commercial banks) play such a large role in this debt financing. Why don't businesses simply sell debt issue in securities markets rather than going through the hassle of securing loans from financial intermediaries?

As Mishkin notes, part of the explanation for puzzle 3 is that obtaining debt financing through a financial intermediary rather than through a securities market can significantly reduce transaction costs. This reduction occurs for two main reasons.

First, financial intermediaries help to match borrowers and lenders, cutting down on their search costs. For borrowers with special needs and circ*mstances, these search costs can be very high. [Indeed, as will be clarified below, a borrower whose needs and circ*mstances are too special may be unable to secure any lending at all through securities markets because of high information costs.]

Second, financial intermediaries engage in asset transformation, which allows them to reduce transaction costs by taking advantage of various "economies of scale."

More precisely, financial intermediaries pool together funds from manydifferent lenders under contractual terms that these lenders find attractive-- e.g., withdrawal upon demand (liquidity). They then use these pooledfunds to create new types of loan instruments specifically tailored to thespecial needs and circ*mstances of those who borrow from them. This assettransformation can take a wide variety of forms. For example, it may takethe form of mutual fund transactions in which many small lenders buy sharesof large diversified stock or bond portfolios. Or it may take the form ofsavings and loan transactions in which the funds from many small depositaccounts are pooled together to finance mortgages.

This pooling generally permits financial intermediaries to significantlyreduce transaction costs by taking advantage of economies of scale, areduction in costs per dollar loaned as the size (scale) of the loanprincipal increases.

For example, one way in which pooling can lead to a reduction intransaction costs through economies of scale is if the costs incurred inwriting up a loan contract (lawyers' fees, title searches, etc.) are fairlyinsensitive to the size of the loan principal. To illustrate, suppose thecost of writing up a loan contract for $100,000 is the same as the cost ofwriting up a loan contract for $10,000: namely, $100. Suppose, also, thatall such costs are borne by the borrower. Compare the costs paid by theborrower in the following two cases:

(a) The resources of ten different lenders are pooled together by afinancial intermediary to construct a single loan contract with a borrowerMr. Jones for a loan principal of $100,000, with each lender contributing$10,000.

(b) Ten different lenders individually write up ten different loancontracts with Mr. Jones, each for a loan principal of $10,000.

In each case (a) and (b), Mr. Jones receives the same total loanprincipal of $100,000. However, transaction costs are substantiallydifferent. In case (a), total transaction costs are only $100 -- only oneloan contract is written -- so Mr. Jones only has to pay $100. In case (b),total transaction costs are $100 * 10 = $1000 since ten different loancontracts are written, hence Mr. Jones has to pay $1000.

Another way in which pooling can lead to a reduction in transactioncosts through economies of scale is by permitting the spread of equipment andother capital costs over large numbers of borrowers. Forexample, the cost of installing a sophisticated computer system to keep trackof financial transactions (e.g., interest payments) with just one borrower,such as Mr. Jones, might be prohibitivefor a lender with no other borrowers. However, a lender (e.g., a financial intermediary) simultaneously transacting with a large poolof borrowers could handle these equipment costs by charging each of the borrowers in his borrowing pool a small fraction of these costs.

Asymmetric Information Problems Revisited

Asymmetric information is said to exist between a buyer andseller of an asset if either agent has information relevant for the exchangethat is not available to the other agent. As discussed in Mishkin (Chapter2), asymmetric information can lead to problems of adverse selection andmoral hazard.

This section starts with a brief review of the types of adverseselection and moral hazard problems endemic to financial markets. Theimportance of these problems as key explanatory factors underlying Mishkin'seight financial structure puzzles is then examined.

A. Adverse Selection in Financial Markets

Recall from Chapter 2 that adverse selection is a problem that arisesfor buyers of assets when they have difficulty assessing the quality of theseassets in advance of purchase. Consequently, it is a problem that arisesbecause of asymmetric information between buyers and sellers of assetsbefore any purchase agreement takes place.

Specifically, the adverse selection problem is that the stepstaken by buyers to protect themselves against purchases of poor qualityassets may have the perverse effect of lowering the average quality of thepool of assets that sellers bring to the market. In short, adverse selectionis an adverse pool effect.

Adverse selection is a serious problem in financial markets, becausefinancial transactions are intrinsically characterized by asymmetricinformation. Borrowers (sellers of financial assets) generally have privateinformation that is more accurate than the information possessed by lenders(buyers of financial assets) regarding the attributes and prospects ofborrowers. Consequently, a lender may still be uncertain about the defaultrisk of a loan contract even after checking into the standard "five C" riskfactors for a borrower -- capacity (to repay), capital, character,collateral, and conditions (of the economy).

If lenders try to protect themselves against default risk by settingtheir contractual terms in a manner appropriate for the expected(i.e., average) quality of their loan applicants, then -- as explainedat some length in Chapter 2 -- they run the risk that high risk borrowerswill be encouraged to self-select into their loan applicant pool while at thesame time low risk borrowers will be encouraged to self-select out of thispool. The resulting adverse effects on the quality of their loan applicantpool constitutes an example of adverse selection.

B. Moral Hazard in Financial Markets

As detailed in Chapter 2, Moral hazard is said to exist in thecontext of a financial market if, after a purchase agreement has beenconcluded between a buyer and seller of a financial asset:

• the seller changes his or her behavior in such a way thatthe probabilites (risk calculations) used by the buyer to assess thequality of the financial asset are no longer accurate;
• the buyer of the financial asset is only imperfectly able tomonitor (observe) this change in the seller's behavior.

For example, a moral hazard problem arises if, after a lender haspurchased a debt security from a borrower, the borrower increases the risksoriginally associated with the debt security by investing his borrowedfunds in more risky projects than he originally reported to the lender.

Adverse Selection in Relation to Puzzles 1--7

Consider the most obvious possible solution to adverse selection infinancial markets: elimination of the asymmetry in information that existsbetween buyers and sellers of financial assets prior to purchase agreements.

It will now be shown why financial intermediaries (in particular banks)are better able than securities markets to accomplish the elimination ofthis type of asymmetric information, which helps to explain puzzles 1 through4. Moreover, in the course of this discussion, it will be seen why puzzles 5through 7 can also be explained in part as the result of attempts toeliminate this type of asymmetric information.

Low-risk borrowers are willing to pay to communicate information abouttheir attributes and prospects, and lenders are willing to pay forinformation about borrower attributes and prospects. This provides a profitopportunity to those who are willing and able to specialize in gathering thistype of information.

Participants in securities markets rely on the provision of informationby private investment advisory firms such as Moody's and Standard and Poor's,whose ratings are designed to measure default risk. Private production andsale of information does not completely resolve adverse selection problems insecurities markets, however, because of "free-rider" problems.

A free-rider problem occurs when people who do not pay forinformation take advantage of the information that other people have paid forby observing and mimicking their behavior. This reduces or even eliminatesthe ability of people to profit from the purchase of information and hencediscourages them from purchasing information in the first place. This, inturn, weakens the ability of private firms to profit by selling information.

As a consequence of free-rider problems, private provision ofinformation in securities markets tends to be underprovided, in the sensethat it is insufficient to eliminate adverse selection problems. As aresult, many small newly-established firms have a difficult time obtainingexternal funds in securities markets because lenders lack the informationneeded to verify their quality (financial soundness). In contrast,large well-established firms have an easier time obtaining external fundsin securities markets because lenders are more confident about their quality.

This adverse selection analysis helps to explain puzzles 1, 2, and 6-- why debt and equity issue in securities markets is not the major source ofexternal funds for most borrowers, especially for individuals and smallbusinesses.

Another possibility is for government to regulate securities markets insuch a way that the security issuers, themselves, are encouraged or required to revealaccurate information about their attributes and prospects. This is theapproach followed in the United States and in most countries throughout theworld. In the United States, the government agency in charge of ensuringinformation disclosure in securities markets is the Securities and ExchangeCommission (SEC).

This helps to explain puzzle 5 -- the fact that the financial sector isone of the most heavily regulated sectors of the economy.

Although government regulations encouraging and requiring information disclosure lessenadverse selection problems, they do not eliminate them. Security issuersstill have more information about their financial condition than purchasers,in spite of disclosure regulations, because these disclosure regulationsare necessarily written in broad general terms. Moreover, it can bedifficult, even for the SEC, to ensure that disclosed information isaccurate.

Financial intermediaries such as banks have an easier time ensuringaccurate and complete information disclosure and hence the reduction orelimination of adverse selection problems.

Most importantly, banks can profitably specialize in informationgathering about particular types of loans, e.g., home mortgage loans, orloans to businesses in a particular type of industry. Free-rider problemsare avoided by banks because most of their loans are private, i.e., they arenot traded on an open market. Consequently, other traders cannot use theinformation gathered by a bank to make competing bids for its loans, biddingup prices (i.e., bidding down interest rates) to a point where the bank makesno profits.

Also, banks may be able to force borrowers to reveal theirtrue type (high or low risk) through special loan contract provisions.

For example, borrowers may be required to pledge some of their ownassets as collateral, which the bank can claim if the borrower defaults.Since, in general, only low risk types are willing to offer substantialcollateral, the amount of collateral pledged in a loan contract acts as asignal to the bank regarding the quality of the borrower.

In addition, collateral provisions reduce the consequences of adverseselection for banks because they reduce the losses incurred by the banks incase of default. The net worth (or equity capital) of aborrower -- defined as the difference between what he owns (his assets) andwhat he owes (his liabilities) -- can play a similar role to collateral inreducing the default risk for a bank to the extent that the bank ispermitted by law to take title to the borrower's assets in case of default.Since bankruptcy regulations typically permit borrowers to protect at leastsome of their assets from seizure by creditors, however, collateralprovisions provide more security to banks than borrower net worth per se.

This adverse selection analysis helps to explain puzzle 7 -- whycollateral is a prevalent feature of debt contracts for both households andbusinesses.

In addition, this adverse selection analysis suggests why financialintermediaries in general, and banks in particular, play a greater role inthe provision of external funds for businesses than do debt and equitysecurities markets. Consequently, it helps to explain puzzles 3 and 4.

Moral Hazard in Relation to Puzzles 1-5 and 7-8

As reviewed above, moral hazard arises in a financial market after afinancial transaction has taken place, when the seller of a financial assethas an incentive to conceal information and to act in a way that may notreflect the interests of the buyer of the financial asset. As will now beseen, moral hazard has important consequences for financial structurethat help to explain puzzles 1-5 and 7-8.

Puzzle 1 concerns why businesses do not make more extensive use of equity(stock) issue to raise external funds. One reason inhibiting this use is aparticular type of moral hazard associated with the ownership of common stock.

When a business is organized in corporate form, its owners are itscommon stockholders. In general, the managers of a corporation own only asmall fraction of the outstanding common stock shares of the corporation.Consequently, there is a separation of ownership from control. That is, theowners of the corporation (called the principals) are not the samepeople as the managers of the corporation (called the agents of theowners).

Except in times of extreme duress, the common stockholders (principals)of a corporation usually do not actively manage the day-to-day operations ofthe corporation. Consequently, the equity stake of common stockholders makesthem more comparable to lenders than to active owners, and the managers(agents) are essentially borrowers of the stockholders' equity capital.

This separation of ownership from control constitutes a special form ofmoral hazard, referred to in economics as a principal-agent problem. The objectives of the managers (e.g., increase salaries now) may differ from theobjectives of the common stockholders (e.g., increase investment now toensure higher profits later) to the extent that the managers are compensatedthrough salaries rather than through bonuses tied to profit performance. Inthis case, the managers have an incentive to behave in ways that are not inthe best interests of the common stockholders.

The day-to-day use of funds by managers tends to be hidden from publicview. If the profit performance of the corporation were directly related tomanagerial effort, there would be no information problem because managerialeffort could be discerned from profit outcomes. In general, however,corporations are subject to positive and negative shocks from externalsources that make it difficult to attribute profit performance solely tomanagerial effort.

Consequently, common stockholders have an incentive to monitor theactivities of managers to protect themselves against principal-agentproblems. However, this monitoring is costly in terms of both time andresources. Indeed, as Mishkin notes in Chapter 8, economists refer to monitoringactivities as costly state verification.

Moreover, when ownership of the corporation is widely dispersed,free-rider problems make it particularly difficult to carry out effectivemonitoring. Although owners of common stock are entitled to vote atstockholder meetings on matters of corporate management, most commonstockholders of widely held corporations do not bother to attend stockholdermeetings in person, or even to read the annual reports of the corporation.Instead, they count on being able to free-ride on the efforts of other stockholders who do attend these meetings and who do read these reports. Thus, theamount of information generated through monitoring of managers tends to beinsufficient to eliminate principal-agent problems.

For these reasons, common stockholding is less desirablethan it would be in the absence of principal-agent problems, making it harderfor businesses to raise external funds through equity issue. In contrast,debt securities are structured to pay the holder a fixed amount at periodicintervals regardless of profit performance (except in the extreme case ofbankrupcty). Consequently, holders of corporate debt are less vulnerable toprincipal-agent problems and have less frequent need to monitor theactivities of managers than do common stockholders.

This moral hazard analysis helps to explain puzzle 1 with regard tocommon stocks -- i.e., why common stocks are not the most important source ofexternal financing for businesses.

Holders of "preferred" stock issued by a corporation are promised astream of fixed per-share dividend payments, typically expressed as apercentage of the face value of a share. Hence, like debt holders, they areless vulnerable than common stockholders to principal-agent problems.

However, businesses can miss dividend payments to preferred stockholders withno immediate penalty (unlike the case for debt payments); and preferred stockpayments are subordinate to debt payments in case of bankruptcy. Hence,preferred stock is riskier than debt securities issued by the samecorporation. Moreover, preferred stock payments are paid from acorporation's after-tax earnings, making them more costly to the corporationthan debt payments, which are paid out of pre-tax earnings.

Combining these observations with Mishkin's moral hazard analysisabove helps to explain why puzzle 1 holds for any form of equityissue, whether common stock or preferred stock.

As with adverse selection, the persistence of principal-agentproblems due to free-rider problems gives government an incentiveto regulate financial markets. For example, most countries have lawsthat require corporations to adhere to standard accounting principlesand that impose penalties for managerial fraud (e.g., embezzlement ofprofits).

This helps to explain puzzle 5 -- why the financial sector is amongthe most heavily regulated sectors of the economy.

A financial intermediary permitted by law to hold equity securitiescan protect itself against principal-agent problems by holding large blocksof common stock shares from individual corporations. This gives thefinancial intermediary both the incentive and the power to monitor managerialactivities very closely, thus overcoming the free-rider problems that arisewhen corporate stockholding is widely dispersed.

For example, Mishkin discusses the specialcase of a "venture capital firm." A venture capital firm is a specialtype of financial intermediary that uses the pooled resources of its venturepartners to provide start-up capitalization to new businesses in exchange forequity shares in these businesses. To reduce moral hazard problems, aventure capital firm usually participates in the management of these newbusinesses, so that their management activities can be closely monitored.Moreover, the new businesses are prevented from marketing their equity toanyone except the venture capital firm. This ensures that no other investorscan free-ride on the monitoring efforts of the venture capital firm.

More generally, banks and other financial intermediaries specializing inprivate loans can avoid free-rider problems in the face of moral hazard.With private loans, a bank is assured that no one else can free-ride on itsmonitoring and enforcement efforts. Consequently, the bank has an incentiveto include in its loan contracts various restrictive covenants --i.e., provisions aimed at reducing moral hazard -- and to spend time andresources on monitoring to ensure their enforcement. The restrictivecovenants generally take the following forms: (a) prohibitions againstundesirable behavior by borrowers (e.g., excessive risk-taking); (b)encouragement of desirable behavior by borrowers (e.g., insurance coverage,maintenance of a minimum level of net worth, etc.); (c) collateralrequirements; and (d) provision of pertinent information in the form ofperiodic accounting and income reports.

This analysis of how financial intermediaries effectively deal withmoral hazard helps to explain puzzles 1 through 4 -- why financialintermediaries play a more important role than securities markets inchanneling funds from lenders to borrowers.

It also helps to explain puzzle 7 -- the common inclusion of collateralprovisions in debt contracts with financial intermediaries.

Finally, it helps to explain puzzle 8 -- why debt contracts enteredinto with financial intermediaries tend to be complicated legal documentscontaining numerous restrictive covenants.

Conflict of Interest Issues

This topic is addressed by Mishkin in Chapter 8 on pages 189-192, at the end of the online pptx slide-set (in pdf) providing notes on Mishkin Chapter 8,and in a separate pptx slide-set (in pdf) providing notes on the Enron scandal and moral hazard.

Basic Concepts and Key Issues for Mishkin Chapter 8

Basic Concepts for Mishkin Chapter 8:

• financial structure (mix and source)
• collateral
• default
• collateralized debt (or secured debt)
• restrictive covenants
• transaction costs
• information costs
• economies of scale
• asymmetric information
• adverse selection
• moral hazard
• free-rider problem
• net worth
• principal-agent problem
• costly state verification
• preferred stock
• venture capital firm
• conflicts of interest

Key Issues for Mishkin Chapter 8:

• Eight puzzles regarding real-world U.S. financial structure
• What are the advantages and disadvantages for U.S. corporations of using stock issue as a source of external finance?
• What are the advantages and disadvantages for U.S. corporations of using securities as a source of external finance.?
• What are the advantages and disadvantages for U.S. corporations of using indirect finance as a source of external finance?
• What are the advantages and disadvantages for U.S. corporations of using loans (particularly bank loans) as a source of external finance?
• Why is the financial sector so heavily regulated in the U.S.?
• Why do larger firms tend to have easier access to securities markets for external finance in the U.S.?
• Why is collateral such a prevalent feature of debt contracts in the U.S.?
• Why are debt contracts so complicated and full of restrictive covenants in the U.S.?
• How do transaction costs help to explain puzzle 3?
• How does adverse selection help to explain puzzles 1 through 7?
• How does moral hazard help to explain puzzles 1-5 and 7-8?
• Possible conflict of interest remedies (e.g., Sarbanes-Oxley Act and the Global Legal Settlement Act of 2002)
• Case Study: The Enron Scandal

Copyright &copy Leigh Tesfatsion. All Rights Reserved.