Moral Hazard Research Articles

Optimism, Overconfidence, and Moral Hazard

Optimism, Overconfidence, and Moral Hazard

Corporate moral hazard and ESG performance: Unveiling the influence of gross enforcement actions and ownership dynamics in US multinational corporations

AbstractExisting research often highlights the impact of several categories of corporate enforcement action on corporate performance, thus overlooking the impossibility of isolating the impacts of other concurrent enforcement actions. The current study employed the gross value and volume of corporate enforcement actions to examine the influence of corporate moral hazard (CMH) on environmental, social, and governance performance (ESGP) along with ownership dynamics. The S&P data from 2018 to 2022 were analyzed, covering 1925 observations of US multinational corporations (MNCs) based on various aspects of corporate governance (CG). Institutional, insider, and family ownership were applied as proxies for ownership structure. CSRHub ratings represented ESGP, while Sustainalytics ratings were used for robustness. The analysis involved various econometric models, including the feasible generalized least squares model (FGLSM). Resultantly, CMH negatively affected ESGP, whereas CG mechanisms revealed a positive influence. Contrary to existing literature, the size of corporate law cases is a stronger proxy for CMH than the amount of enforcement actions. Although institutional owners decrease the number of enforcement actions, they encounter substantial penalties. Above‐average insiders reduce lawsuits and exert significant control over penalties, while below‐average insiders result in heavier penalties and lawsuits to an extent. Families are the most positively influential owners; having more family owners increases penalties and ESGP but reduces lawsuit size, particularly when ownership exceeds the mean percentage.

Information technology and lender competition

We study how information technology (IT) affects lender competition, entrepreneurs’ investment, and welfare in a spatial model. The effects of an IT improvement depend on whether it weakens the influence of lender–borrower distance on monitoring costs. If it does, it has a hump-shaped effect on entrepreneurs’ investment and social welfare. If not, competition intensity does not vary, improving lender profits, entrepreneurs’ investment, and social welfare. When entrepreneurs’ moral hazard problem is severe, IT-induced competition is more likely to reduce investment and welfare. We also find that lenders’ price discrimination is not welfare-optimal. Our results are consistent with received empirical work on lending to SMEs.

Bank competition and ESG performance‐evidence from Chinese listed firms

AbstractThis study employs a two‐way fixed effects model to investigate the influence of bank competition on ESG performance of local firms and its underlying mechanisms based on the geographical distribution of bank branches and firms. Our results show that the increased level of competition among banks contributes positively to the ESG performance of firms and the promotion effect is more prominent in small firms, young firms, and nonstate‐owned firms. Industry heterogeneity analysis indicates that bank competition could be more beneficial for the sustainable development of low‐pollution, low‐tech industries, and industries that have a higher linkage with the financial industry. The mechanism analysis further reveals the mediating effect of financial constraints, green innovation, and moral hazards on firms' ESG performance. This study extends the existing understanding of the firm‐level consequences of bank competition and sheds light on the financial development drivers of corporate ESG performance in emerging market countries.

Building cybersecurity resilience: integrating defense and recovery investment strategies in an expected resilience framework

PurposeTo remain competitive in an unpredictable environment where the complexity and frequency of cybercrime are rapidly increasing, a cyber resiliency strategy is vital for business continuity. However, one of the barriers to improving cyber resilience is that security defense and accident recovery do not combine efficaciously, as embodied by emphasizing cyber security defense strategies, leaving firms ill-prepared to respond to attacks. The present study thus develops an expected resilience framework to assess cyber resilience, analyze cyber security defense and recovery investment strategies and balance security investment allocation strategies.Design/methodology/approachBased on the expected utility theory, this paper presents an expected resilience framework, including an expected investment resilience model and an expected profit resilience model that directly addresses the optimal joint investment decisions between defense and recovery. The effects of linear and nonlinear recovery functions, risk interdependence and cyber insurance on defense and recovery investment are also analyzed.FindingsAccording to the findings, increasing the defense investment coefficient reduces defense and recovery investment while increasing the expected resilience. The nonlinear recovery function requires a smaller defense investment and overall security investment than the linear one, reflecting the former’s advantages in lowering cybersecurity costs. Moreover, risk interdependence has positive externalities for boosting defense and recovery investment, meaning that the expected profit resilience model can reduce free-riding behavior in security investments. Insurance creates moral hazard for firms by lowering defensive investment, yet after purchasing insurance, expanded coverage and cost-effectiveness incentivize firms to increase defense and recovery spending, respectively.Originality/valueThe paper is innovative in its methodology as it offers an expected cyber resilience framework for integrating defense and recovery investment and their effects on security investment allocation, which is crucial for building cybersecurity resilience but receives little attention in cybersecurity economics. It also provides theoretical advances for cyber resilience assessment and optimum investment allocation in other fields, such as cyber-physical systems, power and water infrastructure – moving from a resilience triangle metric to an expected utility theory-based method.

Analyzing supply-side moral hazard behaviors in Botswana's health care market: A qualitative study

This paper aims to analyse the behaviours and practices of health care service providers that constitute supply-side abuse of the medical health insurance schemes premised on the notion that patients visit doctors precisely to learn what amount and type of care is medically necessary. Using qualitative methods, individual in-depth interviews were carried on private health service practitioners and thematic analysis via SPSS. The study identifies systemic abuses like overcharging, billing for services not provided, and over prescription. Implication of these findings show that Fee-for-Service Payment Models incentivize providers to deliver more services, leading to potential over-utilization and increased costs in Botswana’s healthcare; due to information asymmetry providers may prioritize quantity over quality of care exploiting patients’ lack of knowledge to recommend unnecessary tests or treatments to maximize on revenue but also costs. On how to minimize supply side moral hazards, the propositions is for pursuance of cost containment strategies to ensure the smooth operation of the schemes like price listings, educate beneficiaries on cost implications and sustainability threats. These propositions can be instituted through an industry led bench-marking, on nationally through regulatory frameworks since moral hazards are an economic cost as inefficiencies brings mis-allocation of resources to enhance the sustainability of medical aid-based health care provisioning.

Exploring the Effects of the Information Asymmetry on the Card-Debt Crisis

The article aimed to explore the effects of the information asymmetry on the card-debt crisis in Taiwan’s credit card market. The card-debt crisis of the credit cards broke out in Taiwan in 2005. To improve this situation, the financial authorities were forced to intervene in the market. The article employed the documents analysis and collected the related literature and statistical data to construct the information asymmetry model and the proposed hypotheses of the adverse selections and the moral hazards. The results concluded that the card-debt crisis did stem from the information asymmetry, and was alleviated by the intervention of the financial authorities.

Challenges in Paediatric Xenotransplantation: Ethical Components Requiring Distinct Attention in Children and Obligations to Patients and Society.

The transplantation of non-human organs into humans, or xenotransplantation (XTx), has recently garnered new attention and is being developed to help address the problem of organ scarcity in transplantation. Ethical issues surrounding XTx have been studied since initial interest arose decades ago and have experienced renewed discussion in the literature. However, the distinct and relevant differences when applied to children has largely been overlooked with few groups attending to the concerns that XTx in children raises. In this paper, we explore ethical challenges to be expected in paediatric XTx, in particular exploring organ sizing concerns, infectious risks, psychological burdens, and issues of moral hazard. We review these domains with the aim of highlighting the implications of pursuing paediatric XTx and the cross-disciplinary approach needed to solve these issues. Children require a unique analysis from a bioethical perspective to best prepare for the issues XTx presents.

Do repeated government infusions help financial stability? Evidence from an emerging market

While government led bank capital infusions in US and other developed markets have been usually contingent an external shock or crisis episode, India presents a unique setting where significant capital infusions happen annually to stabilize the weak balance sheets of undercapitalized government owned public sector banks. Such “repeated” capital infusions can either better engender financial stability, given the timely government interventions; or create instability arising from possible moral hazard concerns. "Do such repeated government capital infusions lower banks’ financial risks and improve financial stability?” We shed light on the question through the lens of capital infusions in the Indian market. Based on the exhaustive sample of government capital infusions into public sector banks for the period 2008–18, we find robust evidence that capital infusions are associated with economically significant higher default, capital shortfall and network risks post-infusion, signaling a moral hazard problem, where treated banks may assume more risky investments.

Frequência de Internações Ponderadas (FIP): uma Proposta de Indicador para Mitigar o Risco Moral em Contratos de Gestão Hospitalar

In this article, the relationship between the hospital departures indicator, the main indicator for evaluating the performance of hospital management contracts in Bahia, and the incidence of moral hazard in light of Agency Theory was evaluated. Using a qualitative approach based on management contracts and data from the Hospital Admission System (SIH/SUS) in 2019, the performance of three hospitals representing the prevailing management models in the state was compared: direct management, Social Organization (OS), and Public-Private Partnership (PPP). The lower productivity in direct management and the higher frequency of low-complexity hospitalizations in the OS suggest the incidence of moral hazard in service delivery. As a strategy to mitigate this risk, a quantitative indicator is proposed for management contracts, which considers different types of hospitalizations in a weighted manner, based on variables available in the SIH/SUS. Although the inconsistencies in this system limit the specificity and potential of the proposed indicator, it is believed that its use can contribute to improving the evaluation of hospital management contracts and enhancing the SIH/SUS database, enabling further study of hospital admission measurement in future research.

Cracking the Code: Hidden Choices and Visible Impacts Pattern Recognition in Corporate Finance

AbstractResearch in corporate finance suffers from bounded rationality due to static modeling. Adopting factor analysis, an unsupervised machine learning approach, and balance sheet information (accounts) over time, we find underlying dynamic latent corporate finance decisions. Our study identifies three latent corporate finance decisions adopted by executives in Pakistan, (1) long-term capital investment, (2) short-term debt credit, and (3) financial flexibility. The order of the decisions and the empirical tests highlight agency problems rooted in familial ownership concentration. We find that long-term capital investment and short-term debt credit decisions significantly reduce the firms’ present and future performance. Conversely, managers do not embrace financial flexibility, despite its ability to improve performance. The study highlights a contradiction, firms bounded by ownership concentration prefer control over performance and do not make decisions to optimize and protect minority shareholders’ wealth, depicting a moral hazard problem.

Accruals quality and efficient investing: Cross-country evidence

This study examines whether the effect of firm-level financial reporting quality − measured in the form of the quality of accruals − on corporate investment efficiency differs across jurisdictions with different strengths of institutional and regulatory enforcement. Institutional enforcement effectiveness relates to operating in jurisdictions with lower vs. higher informational uncertainty about actual firm performance, and where institutions secure the correct function of markets, with limited concerns about the extraction of any unlawful benefits by insiders. This effectiveness should mitigate adverse selection and moral hazard concerns driving inefficient investment, in the way that firm-specific financial reporting quality has been shown to do within single-country settings. Using a sample from 25 countries, accruals quality is positively associated with efficient investing, regardless of any country-level institutional characteristics. This association becomes more pronounced when the country-level strength of institutional enforcement is weaker, consistent with firm-specific reporting quality increasing in importance when country level institutional enforcement worsens. This evidence indicates that, when the effectiveness of institutional enforcement in a country does not successfully alleviate information asymmetries or secure efficient monitoring of corporate insiders by capital providers, there is greater need for firm-specific accounting quality to perform this function and promote efficient firm-level investing.

Optimal financing of highly innovative projects under double moral hazard

A model is proposed for analyzing the financing of highly innovative projects undertaken by an investor and an entrepreneur as partners. It is shown that the optimal contract rewards the entrepreneur for success and failure but penalizes him for moderate returns. This theoretical scheme can be implemented by a hybrid financial structure that combines inside and outside equity and that is subsequently balanced by means of a reassignment mechanism contingent upon the project’s returns. Two settings are compared, one in which either of the partners innovates but not both (single moral hazard) and another in which both partners do (double moral hazard). We show that which setting is best depends on the degree of technological dependence between the partners’ innovation processes. This may explain the coexistence in practice of different financing and partnership arrangements.

Underwriting syndicate structure and foreign IPO underpricing: A team production perspective

Grounded in team production and agency theory, we investigate investment bank opportunism in the context of 466 foreign initial public offerings (IPOs) in U.S. equity markets from 2009 to 2023. Findings reveal that IPO underpricing is higher for foreign firms underwritten by larger and more diverse syndicates owing to concerns about free-riding and moral hazard. Our results are robust to a series of sensitivity tests. Moreover, frequent foreign IPOs by home-country firms and strong home-country legal protection for investors attenuate the positive relationship between underwriting syndicate size and diversity and IPO underpricing. By delineating the collaborative nature of IPO underwriting, this study offers new insights into the implications of syndicate structure for foreign IPO performance.

Small and medium-sized enterprises and sustainable transition: Role of FinTech in a country's banking ecosystem

During the sustainable transition, small and medium-sized enterprises (SMEs) request funding to support environmental, social, and governance (ESG) investments. In particular, these requests clash with information asymmetries typical of the bank–firm relationship, causing SMEs to experience credit crunch phenomena or increased loan costs. This aforementioned phenomenon prompted this study to examine whether FinTech increases banks’ ability to support the development of SMEs aimed at achieving ESG or, better yet, sustainable transition goals. The results suggest that FinTech in a country’s banking ecosystem improves the ESG performance of Italian and British SMEs by addressing adverse selection and moral hazard issues. This study also shows a more pronounced effect in the UK banking ecosystem, which has a higher level of FinTech development and diffusion.

Contracting with cost synergies: Continuous-time double-sided moral hazard

We study optimal effort and compensation in two continuous-time double-sided models with cost synergies. In the co-work synergy model, cost synergies exist between two agents with ongoing effort: each agent's effort reduces his colleague's marginal cost of effort. The agents completely divide the project's cash flow. In the optimal contract, the agent with higher productivity and a bigger cost-reduction influence claims a larger fraction of the cash flow. In the chain synergy model, one agent exerts initial effort to start the project, and her colleague exerts ongoing effort to manage it. The upfront effort reduces the marginal cost of her colleague's ongoing effort. The timing of optimal payments reflects cost synergies across agents and the timing of efforts: Upfront effort corresponds to early payments. We show that the introduction of cost synergies not only alters the allocation of the cash flow but also improves the expected social surplus. This study suggests that cost synergies increase efficiency for a broad set of contracting problems involving teams.

Debt maturity and the marginal value of cash holdings

This study investigates the impact of debt maturity on the marginal value of cash holdings. It posits that short-term debt acts as a crucial governance mechanism by reducing agency conflicts and aligning managerial actions with shareholder interests. Using a sample of U.S. public firms, the results indicate that firms with higher proportions of short-term debt have a greater marginal value of cash, reflecting more efficient resource allocation and reduced managerial opportunism. The necessity for frequent capital market interactions associated with short-term debt mitigates agency conflicts. Additionally, the study explores three potential mechanisms: financial constraints, managerial moral hazard, and information asymmetry.

Ambiguity, information processing, and financial intermediation

This paper incorporates ambiguity and information processing constraints into the He and Krishnamurthy (2012) model of intermediary asset pricing. Financial intermediaries possess greater information processing capacity than households. In response, households optimally choose to delegate their investment decisions. The contractual relationship between households and intermediaries is subject to a moral hazard friction, which results in a financial constraint. We show that ambiguity aversion not only amplifies households' incentives to delegate but also tightens the financial constraint. The calibrated model can quantitatively explain both the unconditional and time-varying moments of observed asset prices while endogenously generating an empirically consistent crisis frequency.

Proses Negosiasi Antara UMKM A.M Tahu Dan Pemasok Bahan Baku Produksi

SME’s are an industry that play an important role in the Indonesia’s economic development. A.M Tahu as one of SME’s have problems in fulfilling raw materials. The existence of special orders and moral hazard from suppliers were often obstacles in the production process so that A.M. Tahu is needed to make a negotiation process to get affordable prices, good quality, and flexibility in the quantity of raw materials with a limited choice of suppliers. The negotiation process certainly does not immediately reach the desired agreement, but efforts need to be made to convince both parties. The research aims to determine the negotiation process that occurs between A.M Tahu and raw material suppliers in reaching agreements. The types of data used in this study are primary and secondary data using AHP (Analysis Hierarchy Process) analysis methods and qualitative descriptive. The results showed that the negotiation process for A.M Tahu has several stages in reaching an agreement between the two parties, including starting from preparation, meetings, offers, and finally agreements. A.M Tahu gets a more convenient raw material price of Rp3,000 per kilo than the price should be, soybean quantity flexibility, and good quality assurance of soybean grain raw materials. A.M Tahu is also prioritized to choose suppliers who are outside the sub-district, and make raw material variables the main thing to consider in supplier selection.

Optimal Bargaining and Moral Hazard

In this paper we attempt to find the answer to the question of how the professional boxers behave ex post to additional money share negotiated ex ante. We find that for each fighter under a certain stake threshold there is an incentive to put in huge efforts for the forthcoming fight and that above that threshold, the opposite is true leading to a phenomenon of moral hazard. We also find that bargaining is successful in the absence of moral hazard. Finally, the optimal effort of the fighter will increase (decrease) for his (his opponents’) additional outside option.