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Article
Publication date: 1 April 1996

John Dobson and Ken Riener

This article models debt market equilibrium given an expanded notion of rational behavior. The model extends Diamond's model of reputation acquisition, by assuming that…

Abstract

This article models debt market equilibrium given an expanded notion of rational behavior. The model extends Diamond's model of reputation acquisition, by assuming that some prospective borrower‐investors are opportunistic utility maximizers, while others are unwilling to mislead borrowers as to their intended use of borrowed funds. We find that the presence of honest borrowers is necessary to the function of debt markets, and that, as in real‐world markets, opportunistic and honest agents can coexist. We further find that total economic activity is positively correlated to the proportion of trustworthy agents. A major research concern in financial economics is the reconciliation of observed behavior with the predictions of the perfect‐markets, utility‐maximization models, which have traditionally supplied the dominant paradigm in finance. The main focus of recent research has been on the predictions of Agency Theory, or simply Agency (Jensen and Meckling, 1976). Agency has its origins in the property rights literature of economic theory (Alchian, 1969) and, in essence, addresses the following question: How do rational agents act in imperfect markets? A whole range of market imperfections have been analyzed ranging from the simplest type of moral hazard and adverse selection (Thakor, 1989) to the debt capacity of an industry (Maksimovic and Zechner, 1991). Indeed, few if any areas of business theory have escaped Agency's scrutiny; it has, in effect, recast the theory of the firm. In this light, the firm becomes a structure whose efficiency depends upon its ability to mitigate the costs associated with Agency. Firms are “legal fictions which serve as a nexus for a set of contracting relations among individuals” (Jensen and Meckling, 1976, p.310). One of the major gaps in the one‐period models of agency behavior has been the inability of these models to explain management's “honest” behavior (Thaler, 1992). That is, managers do not always engage in such “rational” acts as risk‐shifting, or paying excessive dividends, in order to enrich shareholders (and themselves) at the expense of bondholders. A significant move toward reconciling Agency's predictions with observed behavior has resulted from the reputation‐acquisition work of Diamond (1989), building on the work of Kreps and Wilson (1982) and Milgrom and Roberts (1982). In these models, agents acquire reputations by demonstrating some consistent mode of behavior through multiple iterations of a contractual situation. Through these iterations, principals modify their beliefs concerning the future behavior of the agent by observing certain outcomes. In Diamond's model, rational agents will not continually choose either a risky project or safe project. Their choice is a function of the interest rate and the stage of the game. Specifically, these agents choose the risky project initially; then, as attrition among risk‐takers causes interest rates to drop, they shift to the safe project for some iterations. As the end of the game approaches, however, these agents once again revert to investing in the risky project. In comparison with the attention that has been devoted to identifying and analyzing market imperfections, the former part of the Agency question — namely the “rational agents” part — has attracted much less attention in the finance literature. In Agency models, rationality has been defined strictly in terms of the individual pursuit of pecuniary wealth. This expected‐utility model has been tested experimentally and has been found to be systematically violated, in at least two fundamental ways: 1) Individuals do not behave as if they are attempting to maximize wealth (Plott, 1986), and 2) Individual behavior is affected by notions of fairness and cooperation (Kahneman, et al, 1986). Attempts to construct a theory of capital market behavior which can accommodate this observed behavior are virtually nonexistent. This lack is probably due to the presumption that opportunistic agents will drive ethical agents out of the market. However, as we demonstrate in the model developed in this paper, this is not necessarily the case. By focusing attention specifically on Agency's rationality premise, the model developed here differs from antecedent Agency models. This article investigates the implication, for financial‐market equilibra, of an alternative rationality premise. We assume that some agents will display the virtues of honesty and trustworthiness in their dealings with Other agents. Modifying Diamond's (1989) model of reputation acquisition in debt markets, the impact of these ‘virtuous’ agents on financial‐market equilibria is investigated. The model indicates that the existence of trustworthy agents in financial markets is not merely desirable from an economic perspective, but actually is essential if debt markets are not to fail. Specifically, if lenders do not belief that some non‐trivial cohort of trustworthy agents exists, then lenders cease to lend and debt markets cease to function. Also, the greater the proportion of honest agents, the greater is the overall level of economic activity; indeed, the existence of honest agents will tend to induce at least some of the opportunistic agents to act virtuously. We find that, as Bowie observes in a more general context, “[i]t only pays to lie or cheat when you can free ride off the honesty of others” (1991, pp.11–12). In addition, the belief in a non‐trivial cohort of trustworthy agents can lead to the elimination of some agency problems.

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Managerial Finance, vol. 22 no. 4
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 April 1989

Jack Claringbull

Examines the evolution of the Contractor′s basis of valuation forrating, the valuation framework currently adopted and the definitionsthat have emerged from litigation;…

Abstract

Examines the evolution of the Contractor′s basis of valuation for rating, the valuation framework currently adopted and the definitions that have emerged from litigation; considers the need for a review of the elements of the valuation framework in the light of recent economic changes and a more accurate approach to quantification. Discusses a possible solution proposed by the Government within the context of England and Wales and also in the light of the Contractor′s Principle in Scotland.

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Journal of Valuation, vol. 7 no. 4
Type: Research Article
ISSN: 0263-7480

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Article
Publication date: 1 January 1984

NORMAN BOWIE

A sustained period of inflation followed by a deep recession, in which demand for space has slumped, has really brought home to property owners the fact that buildings do…

Abstract

A sustained period of inflation followed by a deep recession, in which demand for space has slumped, has really brought home to property owners the fact that buildings do gradually wear out and depreciate in value. The time has passed when tenant demand for space so exceeded supply that rental and capital values for second‐hand buildings equated to those of brand new ones. As in other fields inflation covered up the errors of omission or commission particularly when accompanied by a buoyant economy. The crevasse type of market collapse in 1974/75 seemed but a hiccup to property people travelling along a one way street without end.

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Journal of Valuation, vol. 2 no. 1
Type: Research Article
ISSN: 0263-7480

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Book part
Publication date: 23 May 2017

Abe Zakhem and Daniel E. Palmer

Theories of management require normative justification; that is, they rely on some conception of what is morally good, right, and just. This chapter examines some of the…

Abstract

Theories of management require normative justification; that is, they rely on some conception of what is morally good, right, and just. This chapter examines some of the normative reasons for adopting a stakeholder theory of management and for rejecting the once, and perhaps still, “dominant” shareholder-centric approach. This chapter then surveys some of the prominent “normative cores” that are used to ground stakeholder theory, that is, Kantian, contractarian, feminist ethics, and ethical pragmatism, and the moral obligations that each normative approach generates. Some pressing questions are raised with respect to each normative approach. To what extent ought we to recognize imperfect obligations to shareholders? Are contractarian hypernorms morally substantive? How exactly should we care about stakeholders, and is care even an appropriate attitudinal response? Without some commitment to objective ethical standards, how can pragmatists resolve stakeholder conflict?

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Book part
Publication date: 23 October 2001

Norman E. Bowie

Most economists are committed to some version of egoism. After distinguishing among the various sorts of egoistic claims, I cite the empirical literature against…

Abstract

Most economists are committed to some version of egoism. After distinguishing among the various sorts of egoistic claims, I cite the empirical literature against psychological egoism and show that attempts to account for this data make these economists' previous empirical claims tautological. Moreover, the assumption of egoism has undesirable consequences, especially for students; if people believe that others behave egoistically, they are more likely to behave egoistically themselves. As an alternative to egoism I recommend the commitment model of Robert Frank.The equivalent of egoism at the organizational level is that business firms seek (should seek) to maximize profits. I present arguments to show that a conscious attempt by managers to maximize profits is likely to fail. A committed altruism is more likely to raise profits. I suggest that a firm should take as its primary purpose providing meaningful work for employees.

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The Next Phase of Business Ethics: Integrating Psychology and Ethics
Type: Book
ISBN: 978-0-76230-809-5

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Article
Publication date: 1 February 2004

Kerry Pedigo and Verena Marshall

Globalisation has seen diverse cultures becoming increasingly entwined and interdependent as business organisations operate in a borderless world. When organisations…

Abstract

Globalisation has seen diverse cultures becoming increasingly entwined and interdependent as business organisations operate in a borderless world. When organisations operate internationally they often find that countries differ in what is considered wrong or right. The objectives of the research were to identify cross‐cultural ethical dilemmas confronting Australian managers, and explore the strategies they utilise in dealing with those dilemmas in their international operations. The study raises the questions of whose ethics should be applied, and whether a set of universal ethical norms should be or can be developed. The discussion emanating from such questions also raises important issues for the training and ongoing management of employees undertaking business in the international environment. A total of 70 Australian managers from the mining, textile and information technology industries participated in this research, representing a cross‐section of Australian industry groups from the primary, secondary and tertiary sectors undertaking business in the international arena. The research utilised a conceptual framework that emerged from the moral philosophies represented in the international business arena Thr research utilised a conceptual framework that emerged from the moral philosophies represented in the international business arena, namely ethical relativism (Bowie 1996; Kohls & Buller 1994; Bowie & Duska 1990; Dobson 1990) imperialism (Gopalkrishnan 2001; Donaldson 1996b; De George 1993) and universalism (Beauchamp & Bowie 2001; Donaldson 1996b).

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Journal of European Industrial Training, vol. 28 no. 2/3/4
Type: Research Article
ISSN: 0309-0590

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Book part
Publication date: 23 October 2001

John W. Dienhart, Ronald F. Duska and Dennis J. Moberg

Abstract

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The Next Phase of Business Ethics: Integrating Psychology and Ethics
Type: Book
ISBN: 978-0-76230-809-5

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Article
Publication date: 1 June 2000

Norman Bowie

Uses Kant’s moral philosophy to provide a normative theory of leadership. First shows how Kant’s philosophy would reject instrumental theories of leadership and most…

Abstract

Uses Kant’s moral philosophy to provide a normative theory of leadership. First shows how Kant’s philosophy would reject instrumental theories of leadership and most charismatic theories of leadership. Perhaps somewhat more surprisingly, it questions some of the assumptions of servant leadership and puts constraints on transformational leadership and the leader as educator. The central concept of Kant’s moral philosophy is the dignity given to autonomy. Thus a good leader ought to respect and enrich the autonomy of followers. The Kantian leader turns followers into leaders.

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Leadership & Organization Development Journal, vol. 21 no. 4
Type: Research Article
ISSN: 0143-7739

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Article
Publication date: 1 May 1993

Gerald Vinten

The topic of whistleblowing is achieving prominence as a question of social policy. Some influential voices are suggesting that far from whistleblowing — informing on…

Abstract

The topic of whistleblowing is achieving prominence as a question of social policy. Some influential voices are suggesting that far from whistleblowing — informing on organisations —, being socially undesirable, it may in certain circumstances be an activity deserving high praise. Inevitably it entails huge risks to the activist, and these risks need to be personally and carefully considered. John Banham, Director General of the Confederation of British Industry, wrote in support of the Social Audit report on the subject (Winfield 1990), and a committee established by the Speaker of the House of Commons has suggested the possibility of honouring whistleblowers in the British Honours system for their good corporate citizenship. There have also been landmark reports in America, Australia and Canada (Leahy 1978, Electoral and Administrative Review Commission 1990, Ontario Law Reform Commission 1986).

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International Journal of Sociology and Social Policy, vol. 13 no. 5/6
Type: Research Article
ISSN: 0144-333X

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Article
Publication date: 1 January 1996

Gerald Vinten

Some view whistleblowing — informing on illegal or unethical practices in the workplace — as being undesirable. However, if whistleblowing is incorporated as a natural…

Abstract

Some view whistleblowing — informing on illegal or unethical practices in the workplace — as being undesirable. However, if whistleblowing is incorporated as a natural part of the internal corporate communications system it can be transformed into an extremely valuable aid. Provides examples of damaging publicity attracted by companies which fail to realize this, of the equally damaging consequences to the whistleblowers, and of codes of procedure which minimize the harm and maximize the good to both parties.

Details

Corporate Communications: An International Journal, vol. 1 no. 1
Type: Research Article
ISSN: 1356-3289

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