“In much the same way that the corporate governance (separation of ownership from control) dilemma was formulated, institutional investors’ money is today managed by expert individuals, who allocate, as agents, the money of their principals (so-called separation of brains from money). Their interests, as in most principal-agent relationships, are not perfectly aligned and sometimes diverge considerably. While shareholders or fund investors are concerned, under the rational choice model, with an optimal mixture of risk and return that ensures sustained profitability, bankers’ and fund managers’ concerns are markedly different. They have to show that their performance is equal to or better than the rest of the market. Performance affects bonus payments and the bankers’ and fund managers’ tenure in the job. Individuals, who work for institutional investors, are in the market in order to make money and save their jobs and not in order to ‘correct’ prices through arbitrage trading, as the Efficient Market Hypothesis assumes. As a result, (¿aunque funcione la mano invisible de Adam Smith?) they are very likely to follow the herd playing the ‘momentum game’ in the hope that they will be able to sell and materialize their gains, before markets fall. Thus, bankers, traders, and fund managers concentrate on trades and trading techniques that enable them, if not to beat the market, at least, no to post returns inferior to the market average saving their jobs and compensation packages. Namely, they resort to the safest short-term survival strategy disregarding the efficient market hypothesis search for fundamental value. Such behaviour does not only undermine the efficiency of market prices, but also underscores the limitations of disclosure, as it shows that peer pressure and other survival concerns and not new information are the decisive factor in traders’ behaviour".
E. AVGOULEAS, ‘The Global Financial Crisis and the Disclosure Paradigm in European Financial Regulation: The Case for Reform’ (2009) 6 European Company and Financial Law Review 372-. forthcoming, December 2009, Issue 4.
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