TY - CHAP
T1 - Dynamic systems, matching complexity, contributions to corporate financial choice
AU - Wang, Zhi H.
AU - Horsburgh, Stuart
PY - 2011
Y1 - 2011
N2 - The events which unfolded during the period of the financial crisis can be seen as a counterexample to the world depicted by adherents of the rational expectations paradigm, presenting as much a challenge for modern macroeconomics as it has for the more traditional economic models. For instance, the Royal Bank of Scotland (RBS) had been widely acclaimed by the UK government and the public for their corporate strategy, yet in February 2009 RBS reported a pre-tax loss of £24 billion, the largest in UK corporate history. For another example, executives operating in the banking system often imitate the investment strategies of good performers, which can lead to under-performing investors lending to high-risk borrowers, resulting in ‘herding behaviour’ and frequent runs on the bank (Shiller, 1995), a situation exacerbated by the activities of fund managers and the forecasts of financial analysts which serves only to accelerate speculative bubbles (Froot, Scharfstein, & Stein, 1992). A financial crisis is inevitable. A further example is provided by Lehman Bros who filed for bankruptcy in October 2008 after the value of money market funds fell considerably over a very short period, revealing knowledge about the riskiness of trades in which market operators were trading high-risk securities believing they were low risk. It should also not be possible in a rational expectations world for banks to market subprime mortgage-related securities knowing they have a high likelihood of default to buyers that have not factored this risk into their expectations.
AB - The events which unfolded during the period of the financial crisis can be seen as a counterexample to the world depicted by adherents of the rational expectations paradigm, presenting as much a challenge for modern macroeconomics as it has for the more traditional economic models. For instance, the Royal Bank of Scotland (RBS) had been widely acclaimed by the UK government and the public for their corporate strategy, yet in February 2009 RBS reported a pre-tax loss of £24 billion, the largest in UK corporate history. For another example, executives operating in the banking system often imitate the investment strategies of good performers, which can lead to under-performing investors lending to high-risk borrowers, resulting in ‘herding behaviour’ and frequent runs on the bank (Shiller, 1995), a situation exacerbated by the activities of fund managers and the forecasts of financial analysts which serves only to accelerate speculative bubbles (Froot, Scharfstein, & Stein, 1992). A financial crisis is inevitable. A further example is provided by Lehman Bros who filed for bankruptcy in October 2008 after the value of money market funds fell considerably over a very short period, revealing knowledge about the riskiness of trades in which market operators were trading high-risk securities believing they were low risk. It should also not be possible in a rational expectations world for banks to market subprime mortgage-related securities knowing they have a high likelihood of default to buyers that have not factored this risk into their expectations.
U2 - 10.1108/S2043-9059(2011)0000002019
DO - 10.1108/S2043-9059(2011)0000002019
M3 - Chapter (peer-reviewed)
SN - 9781780520926
VL - 2
T3 - Critical Studies on Corporate Responsibility, Governance and Sustainability
SP - 275
EP - 297
BT - Finance and Sustainability: Towards a New Paradigm? A Post-Crisis Agenda
A2 - Sun, William
A2 - Louche, Celine
A2 - Perez, Roland
PB - Emerald Group Publishing Ltd.
ER -