Chapter

Conflicts of Interest

Roy C. Smith and Ingo Walter

in Governing the Modern Corporation

Published in print February 2006 | ISBN: 9780195171679
Published online September 2006 | e-ISBN: 9780199783618 | DOI: http://dx.doi.org/10.1093/0195171675.003.0010
 Conflicts of Interest

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Potential conflicts of interest are a fact of life among the financial firms that help direct the flow of capital in the modern market-oriented economy. There are essentially two types of conflicts of interest that face intermediary firms: Type 1 conflicts arise between a firm’s own economic interests and the interests of its clients, usually reflected in the misappropriation of economic gains or mispriced transfers of risk; Type 2 conflicts develop between clients, placing the firm in a position of favoring one at the expense of another-bankers who systematically favor corporate clients over investing clients would be an example of this type of conflict. Both types of conflicts can arise either from interprofessional transactions carried out in wholesale financial markets, or in activities involving retail clients.

Keywords: conflicts of interest; financial intermediaries; financial markets; corporate governance

Chapter.  8479 words.  Illustrated.

Subjects: Microeconomics

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