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JOHN NOFSINGER, finance professor at Washington State University, is author of Investment Madness, The Psychology of Investing, and Investment Blunders (Financial Times Prentice Hall). Widely acknowledged as one of the world’s leading experts in investor psychology and behavioral finance, he has been quoted in financial media including The Wall Street Journal, Fortune, BusinessWeek, SmartMoney, Bloomberg, and CNBC, and other media from The Washington Post to Wired.com. Nofsinger’s 1997 paper “Herding and Feedback Trading by Institutional Investors” (written with Richard W. Sias) was awarded “Best of the Best” and “Best Paper in Investments” by the Financial Management Association. He has also done advanced research for the New York Stock Exchange and the Association for Investment Management and Research.

KENNETH KIM is a finance professor at the State University of New York at Buffalo. His work has been published in the Journal of Finance, the Journal of Corporate Finance, the Journal of Banking and Finance, and other leading journals. Kim is co-author of the textbook Global Corporate Finance, and he has served as a financial economist at the U.S. Securities and Exchange Commission, where he worked on diverse issues including M&A regulation.

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In Infectious Greed, two leading financial experts offer a powerful new explanation of why the corporate scandals happened—and propose market-driven reforms that don’t just “patch” the system but fix it for generations to come. Discover how the system came to provide massive incentives for malfeasance by CEOs, boards, auditors, analysts, and investment houses—and learn how those “bad” incentives can be replaced by even more powerful incentives for integrity.

Table of Contents



Preface.


Acknowledgments.


1. The Importance of Investor Confidence.

Asleep at the Wheel. Investor Attitude. Investor Confidence and the Stock Market. Long-Term Economic Effects. Our Approach. Endnotes.



2. The Structure of Corporations.

Business Forms. People in Business. Separation of Ownership and Control. Can Investors Influence Managers? Are Investors Helpless? A System of Problems. International Monitoring. Summary. Endnotes.

I. The Failure of Executives.

3. Executive Compensation and Incentives.

Types of Executive Compensation. Base Salary and Bonus. Stock Options. Options and Accounting. Stock Options and (Mis)Alignment. Who Gets Options? CEO Pay Around the World. Hidden Compensation. Summary. Endnotes.

4. Executive Behavior.

Options and Fraud. Timing of Sales. Company Loans-A Potential Abuse. Grand Theft. Adelphia. Enron. Tyco. Why Do Some Executives Misbehave? Summary. Endnotes.

II. The Failure of Monitoring Systems.

5. Accountants and Auditors.

Accounting Functions. Auditing. The Changing Role of Accounting. From Management to Fraud. Fraud, Plain and Simple. Consultants. When the Auditor is also a Consultant. Fear of All Sums. An International Perspective. Summary. Endnotes.

6. The Board of Directors.

Current Board Regulations. More Attention on Directors. Who Are Directors? The Board's Functions. Problems with Boards. Is Enron's Board Partially to Blame? Summary. Endnotes.

7. Investment Banks.

Some Historical Perspective. Investment Banking Activities. IPO Problems. IPOs and Fraud. Structured Deals. Summary. Endnotes.

8. Analysts.

The Traditional Role of the Analyst. Can Analysts Predict? Analyst Compensation. Potential Conflicts of Interest. Analysts at Investment Banks. Just Who Is the Client? Changing Roles. Summary. Endnotes.

9. More Failed Monitors: Credit Rating Agencies and Lawyers.

Credit Rating Agencies. A Brief Historical Perspective. The Ratings. Criticism. Enron. Summary of Credit Agency Problems. Attorneys. Protecting Lawyers. Summary of Attorney Problems. Endnotes.

III. Shortcomings in Enforcement and Investor Activism.

10. The Securities and Exchange Commission.

The Securities Acts. Organizational Structure of the SEC. Assessment of the Acts and the SEC. SEC Problem Areas. Arthur Levitt's I Told You So. The Man in the Middle: Harvey Pitt. Summary. Endnotes.

11. Investor Activism.

What Is Shareholder Activism? Does Institutional Shareholder Activism Pay Off? Potential Roadblocks to Effective Shareholder Activism. The Future Role of Shareholder Activists. Summary. Endnotes.

IV. Restoring Confidence.

12. New Rules, Regulations, and Policies.

A Review of the Corporate Problems. Sarbanes-Oxley Act of 2002. Public Company Accounting Oversight Board. Auditor Independence. Corporate Responsibility. Enhanced Financial Disclosures. Analysts' Conflicts of Interest. SEC Resources and Authority. Corporate and Criminal Fraud Accountability and Penalties. Summary of the Act. Other Proposals for Change. New York Stock Exchange. Expensing Stock Options. More Change. Endnotes.

13. Create Good Incentives for Long-Term Solutions.

The Power of Incentives. Our Recommendations. Stock and Stock Option Incentives. Insider Equity Sales. Changing Option Structure. Auditing Firm Incentives. Boards of Directors. Investment Banks and Analyst Incentives. Credit Rating Agencies. Shareholders. Summary. Endnotes.

14. Regaining Investor Confidence.

Protecting Investors (Not). Investor Confidence. Failing to Regain Confidence. Regaining the Confidence. Summary. Endnotes.

Index.

 
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