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Working papers: 2019

ISSN 2632-9611

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WP516: Elucidating Limited Shareholder Engagement: Identifying Ethical and Epistemological Factors in the Fiduciary

Helen Mussell

The legal concept of fiduciary, from the Latin fīdūcia meaning trust, plays a fundamental role in all financial and business organisations: it acts as a moral safeguard of the relationship between trustee and beneficiary, ensuring that the beneficiaries’ best interests are met. It is often referred to as a duty of care. This paper focuses on the ethics of the fiduciary, but from a unique and historical perspective, going back to the original formulation of the fiduciary within a familial context, to reveal not only why care plays a central role in the fiduciary, but to also uncover key foundational presuppositions regarding agential capabilities embedded in the trustee-beneficiary relationship. In doing so, the paper uncovers ethical issues of an epistemological kind at the core of the fiduciary. By using Miranda Fricker’s theory of pre-emptive testimonial injustice, the analysis helps shed light on shareholder activism and explains limited engagement to date.

WP515: Do Corporate Governance Ratings Change Investor Expectations? Evidence from Announcements by Institutional Shareholder Services

Paul M. Guest and Marco Nerino

This paper examines empirically the announcement effect of commercial corporate governance ratings on share returns. Rating downgrades by Institutional Shareholder Services (ISS) are associated with negative returns of –1.14% over a 3-day announcement window. The returns are highly correlated with the proprietary analysis of ISS and are decreasing in agency costs, consistent with ratings providing independent information on underlying corporate governance quality. We thus show that the influence and impact of ISS extends beyond proxy recommendations and subsequent voting outcomes. Our findings contrast with the insignificant price impact of Daines, Gow, and Larcker (2010), whose analysis we replicate and successfully reconcile to ours by pooling upgrades and downgrades together.

WP514: Resurrecting the UK Sector National Accounts after 1945

Bill Martin

Building on the methodology explained in Martin (2009), this paper sets itself the task of backcasting the UK national sectoral accounts before 1987, the date prior to which fully comprehensive data are not provided by the Office for National Statistics. Backcast data cover the private, government and overseas sectors. Innovations compared with the earlier paper include the extension of the dataset to begin in 1946 rather than 1948, and, more importantly, an attempt to backcast financial balances for the household and corporate sectors. This attempt involves the backcasting of pension saving before 1963 and of major components of the household and corporate capital account before 1987. The household and corporate sector data are likely subject to greater measurement error than estimates for more aggregate sector balances, as shown in Martin (2009) and provisionally upheld in this paper by simple tests of stability across different data vintages. Subject to further verification and improvements, now in prospect, in official historic data, the derived postwar sectoral estimates may nevertheless enable more robust testing of a variety of long-run macroeconomic hypotheses.

WP513: Fiscal Policy in a Depressed Economy: A Comment

Robert Rowthorn

In an influential article, Delong and Summers (2012) consider the implications of hysteresis for government debt. They derive an upper limit for the after-tax real interest rate. If the interest rate is below this limit, the debt incurred during a one-off fiscal stimulus will be automatically repaid without the need for higher taxes. Their analysis assumes that a one-off stimulus leaves an infinite legacy of future benefits (hysteresis effects) that increase through time. This note extends their analysis to situations where hysteresis effects remain constant or decay in the course of time. By highlighting the hysteresis time profile, it provides a more transparent treatment of debt dynamics.

WP512: Keynesian Economics – Back from the Dead? The Godley-Tobin Lecture

Robert Rowthorn

This paper surveys some the main developments in macroeconomics since the anti-Keynesian counter-revolution 40 years ago. It covers both mainstream and heterodox economics. Amongst the topics discussed are: New Keynesian economics, Modern Monetary Theory (MMT), expansionary fiscal contraction, unconventional monetary policy, the Phillips curve, and hysteresis. The conclusion is that Keynesian economics is alive and well, and that there has been a degree of convergence between heterodox and mainstream economics.

WP511: Fiduciary – Asymmetrical Power, Asymmetrical Care

Helen Mussell

The legal concept of fiduciary plays a fundamental role in all financial and business organisations. It acts as a moral safeguard of the relationship between trustee and beneficiary, ensuring that the beneficiaries’ best interests are met. It is often referred to as a duty of care. Originally formulated within familial law to protect property put into Trust, beneficiaries were women and children, allocated passive and subordinated roles. This paper investigates two aspects of the asymmetrical power relations central to the fiduciary. Firstly it reveals the gendered presuppositions regarding male and female agential capabilities on which the fiduciary is premised, drawing out the origins of the authority differential in the trustee-beneficiary relationship. Secondly, the paper engages with the ethical nature of the fiduciary relationship, arguing that Care Ethics offers a robust framework for explicating the history of the relationship, alongside delivering a morally-enhanced and future-fit fiduciary free of damaging gendered stereotypes.

Working paper (Centre for Business Research, University of Cambridge. Online)