A tale of two arbs : essays on agency and financial institutions

This thesis consists of two essays covering topics in the economics of financial institutions with an emphasis on certain types of potential agency problems. In particular, it investigates two radically different types of "arbs": arbitrators and arbitrageurs. The first essay studies securities arbitration to shed light on a relevant form of financial regulation that was previously unexplored empirically: the self-regulation of financial markets. The second essay investigates the informable financing channel in the context of arbitrageur fund-raising to develop a theory of the limits to arbitrage. Further details of each essay are included below:In Chapter 1, I investigate whether self-regulation in financial markets leads to greater industry bias and expertise in enforcement. Using hand-collected data on securities arbitration disputes from the National Association of Securities Dealers (NASD), I document that pro-industry arbitrators are selected more often to arbitration panels than pro-investor ones (selection on bias) and that experts are also selected more frequently to cases (selection on expertise). Moreover, both patterns vary substantially across cases. Selection on bias is strongest when large brokerage firms are sued and when cases are more important to firms while selection on expertise increases with case complexity. This suggests that arbitrators are assigned to cases in ways that lead to higher industry bias and expertise. To assess whether the NASD is responsible for these patterns, I examine the impact of a change in regulation that greatly reduced NASD control over the selection of arbitrators. Following this change, the allocation of expertise to cases declined while selection on bias increased. These findings suggest that the NASD is not responsible for selection on bias but that it increases selection on expertise. Thus, concerns about favoritism at the NASD may be misplaced and, more generally, self-regulation may increase expertise and even lower industry bias in enforcement.

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2008

Author dc:creator

• Kondo, Jiro Edouard

Advisor dc:contributor.advisor

• Antoinette Schoar, Stephen A. Ross and Dirk Jenter.

• Sloan School of Management.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/45933

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/45933