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Institutional Markets, Financial Marketing, and Financial Innovation

Stephen A. Ross
The Journal of Finance
Vol. 44, No. 3, Papers and Proceedings of the Forty-Eighth Annual Meeting of the American Finance Association, New York, New York, December 28-30, 1988 (Jul., 1989), pp. 541-556
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328769
Stable URL: http://www.jstor.org/stable/2328769
Page Count: 17
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Abstract

Firms and institutions are monitored and controlled through a complex set of implicit and explicit contractual relations. Because of these agency theoretic relations, institutional behavior in financial markets is not a simple reflection of the preference structures of individuals. Institutional preferences give rise to a demand for new financial instruments and innovations, even when the returns on these instruments are "spanned" in the sense of complete pricing. The innovations can be thought of as solving moral hazard problems. An agency theoretic example serves to illustrate the demand, supply, and financial marketing of stripped securities. In short, institutions matter.

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