Financial Ethics: A Positivist Analysis

Financial Ethics: A Positivist Analysis provides a framework for the study of financial ethics built on a broad review of mainstream scholarly research published in refereed finance and economics journals. The work is aimed directly at financial academics and students who are likely to be familiar with mainstream financial economics research. It demonstrates that ethics is already an important part of financial research, and therefore the approach taken is more of a "rediscovery" of the ethical dimension of financial economics. This approach is important not only to remind fellow academics that ethics is a legitimate area of interest to positive financial economics, but also to encourage them to convey this message to their students without departing from mainstream financial theories and models. A distinctive feature of the text is that it adopts a positivist framework for the field of financial ethics. The text proposes that many "finance" problems are actually "ethics" problems; and that many economic phenomena such as monitoring, bonding, certification, signaling, incentive contracts, and governance structures can be explained as mechanisms for controlling moral risks. The text discusses several examples in which an ethics-centered approach to understanding economic phenomena is similar in spirit to other frameworks which have been applied in positive financial research including: the framework used for understanding corporate governance mechanisms as devices for mitigating agency costs and "moral hazards" in contractual relationships; the transaction "governance structure" framework that can explain the existence of hierarchies relative to markets when opportunistic behavior is assumed; and the roles of reputation and corporate culture in making credible commitments of trust in exchange. These "financial ethical technologies" are not mutually exclusive but, rather, mutually enriching ways to deepen our understanding of the same economic phenomena. They are financial technologies because they enhance economic value, and they are ethical technologies because their value enhancing contributions are produced by mitigating moral risks in exchange.

Table of Contents:
PREFACE I 1 CHAPTER 1: NORMATIVE AND POSITIVE APPROACHES TO FINANCIAL ETHICS 1-1 1.1 A WORKING DEFINITION OF FINANCIAL ETHICS 1-1 1.2 FINANCIAL ETHICS AND BUSINESS ETHICS 1-3 1.3 ORGANIZATION OF THE BOOK 1-7 2 CHAPTER 2: FINANCIAL ETHICS AS A FIELD OF STUDY 2-1 2.1 INEVITABLE INTERCONNECTIONS BETWEEN FINANCE AND ETHICS 2-1 2.1.1 THE EXPANDING DOMAINS OF ECONOMICS AND ETHICS 2-2 2.1.2 THE EVOLUTION OF FINANCIAL ECONOMIC RESEARCH 2-4 2.1.3 FINANCIAL SCANDALS 2-6 2.1.4 INVESTOR ACTIVISM 2-8 2.2 EVIDENCE OF ACADEMIC INTEREST IN FINANCIAL ETHICS 2-9 2.3 CHALLENGES TO THE INTEGRATION OF ETHICS AND FINANCE 2-11 2.4 THE FINANCE IS VALUE-FREE ARGUMENT 2-12 2.5 FRAMEWORK FOR FINANCIAL ETHICS 2-14 2.6 CONCLUSION 2-16 3 CHAPTER 3: ELEMENTS OF A POSITIVE FINANCIAL ETHICS 3-1 3.1 ETHICAL EXPECTATIONS AND ECONOMIC VALUE 3-1 3.2 ETHICAL RISK 3-2 3.3 ETHICAL RISK AND PERFECT COMPETITION 3-4 3.4 ETHICAL RISK AND IMPERFECT COMPETITION 3-5 3.5 POSITIVE FINANCIAL ETHICS: AN ILLUSTRATION FROM GAME THEORY 3-5 3.6 HOW VARIATION IN ETHICAL EXPECTATIONS MAY AFFECT THE TRUST GAME 3-8 3.6.1 GROUP SIZE 3-10 3.6.2 INTRINSIC MOTIVATIONS 3-11 3.7 CONCLUSION 3-12 4 CHAPTER 4: THE ETHICAL TECHNOLOGIES OF FINANCE 4-1 4.1 INTRODUCTION 4-1 4.2 FINANCIAL ETHICAL TECHNOLOGIES 4-1 4.3 OVERVIEW OF ETHICAL TECHNOLOGIES 4-2 4.4 INSTRUMENTAL ETHICAL TECHNOLOGIES 4-4 4.5 PROCEDURAL TECHNOLOGIES 4-10 4.6 EXPRESSIVE TECHNOLOGIES 4-16 4.7 ETHICAL TECHNOLOGIES IN THE CONCEPT OF DISCRIMINATING ALIGNMENT 4-18 4.8 CONFLICTS AMONG THE ETHICAL TECHNOLOGIES 4-19 4.9 CONCLUSION 4-20 5 CHAPTER 5: STUDIES ON THE INCIDENCE OF EXPROPRIATION 5-1 5.1 ETHICAL RISKS AND CAPITAL MARKETS 5-1 5.2 ECONOMIC PERFORMANCE ACROSS COUNTRIES 5-1 5.2.1 SOVEREIGN EXPROPRIATION RISK 5-3 5.2.2 TRUST AND EXPROPRIATION RISK 5-6 5.3 ETHICAL RISKS AND CORPORATE FINANCE 5-7 5.3.1 EXPROPRIATION RISK ACROSS COUNTRIES 5-7 5.3.2 EXPROPRIATION RISK ACROSS FIRMS 5-9 5.4 INTRA-SHAREHOLDER EXPROPRIATION 5-13 5.4.1 "SHARKING" AND "TUNNELING" 5-13 5.4.2 MULTIPLE SHARE CLASSES 5-17 5.4.3 "GREENMAIL" 5-18 5.4.4 INSIDER TRADING 5-19 5.5 EXPROPRIATION FROM OTHER STAKEHOLDERS 5-19 5.5.1 EXPROPRIATION FROM EMPLOYEES 5-20 5.5.2 EXPROPRIATION FROM MARKETS 5-21 5.6 SUMMARY 5-25 6 CHAPTER 6: FINANCIAL RESEARCH RELATING TO TRUST 6-1 6.1 TRUSTWORTHINESS 6-1 6.2 TRUST AND THE PRISONER'S DILEMMA GAME 6-2 6.3 TRUST AND GROUP SIZE 6-8 6.4 TRUST AND PRINCIPAL-AGENT RELATIONSHIPS 6-13 6.5 CONCLUSION 6-15 REFERENCES 1

About the Author :
The late George Aragon was Associate Professor of Finance at Boston College and Finance Department Chairman and Chairman of the Ethics Initiative Committee in the Carroll School of Management.

Review :
"If you are looking for a structured, systematic approach to understand how ethical issues impact financial decision makers and financial markets, this book fits the bill. George Aragon has done a wonderful job of collecting a vast array of elements that already permeate the literature in finance, and organizing them into a coherent whole."-- Hersh Shefrin, Mario L. Belotti Professor of Finance, Santa Clara University & author of Beyond Greed and Fear "Virtues such as truthfulness, trust and loyalty play an indispensable but often neglected role in the operations of economic systems. Aragon provides a much needed theoretical and empirical survey of the role of virtue in the functioning of financial markets, the consequences for economic success of a lack of virtue, and the mechanisms that promote and discourage virtuous behavior among actors in financial markets."-- Michael Brennan, Professor of Finance, Anderson School UCLA and Manchester Business School "Despite Professor Aragon's untimely passing in 2009 he left behind a rich text for all students of financial economics. Financial Ethics: A Positivist Analysis makes an important distinction between the ethical dimension in finance, a normative analysis, and the financial dimension of financial ethics, a positive analysis. The majority of the text addresses recent literature as to how and why the effect of immoral behavior on economic value is important to all financial economists. I highly recommend it to all serious students of financial economics."-- Dale O. Cloninger, Professor Emeritus, Finance & Economics, University of Houston-Clear Lake