Ethics in Finance - John Boatright (2011)

Comprehensive vocabulary flashcards based on John Boatright's Ethics in Finance lecture notes, covering core concepts, regulatory frameworks, financial roles, and ethical issues.

Finance

The field broadly concerned with the generation, allocation, and management of monetary resources, including valuation, cash flow generation, and fund usage across personal, corporate, public, and market domains.

Ethics in Finance

The set of moral norms that apply to financial activity broadly conceived.

Financial Contracting

A mutual agreement between two parties that forms the structural basis for most financial activities, such as bank loans and stock trades.

Information Asymmetry

A condition in financial markets where two parties either do not possess the same information or do not have equal access to information.

Substantive Fairness

Fairness in a financial market where the price of a trade accurately reflects the actual value of the underlying shares or assets.

Procedural Fairness

Fairness in a financial market where trading parties have a sufficient and equal opportunity to accurately determine the value of assets or shares.

Blue Sky Laws

State laws that require expert evaluation of securities offered for sale, aiming to ensure substantive fairness in financial markets.

Fraud (in financial transactions)

An unfair trading practice committed when one party knowingly makes a material misstatement or omission that another party reasonably relies on to their detriment.

Manipulation

An unfair trading practice that deceives market participants by creating a false impression through trading activity rather than through false statements or omissions.

Pump and Dump Scheme

A manipulative scheme in which a trader buys a thinly traded stock to artificially drive up its price (pump) and then sells it at the inflated price (dump).

Prospectus

A legal document provided by issuers of securities or financial products offering sufficient information for buyers to make informed decisions.

Insider Trading

The illegal practice of trading by corporate insiders based on material, nonpublic information, violating fiduciary duty and taking unfair advantage of standard outsiders.

Implied Contracts

Contracts in which not every detail is explicitly set into writing, unlike express contracts, and which generally cannot be legally enforced for unstated details.

Relational Contracting

A method of contracting that relies on building good working relationships to navigate gaps, ambiguity, and incompleteness in standard contracts.

Financial Intermediaries

Firms such as banks, brokerage firms, funds, and financial planners that enable clients to consummate transactions rather than engaging in transactions directly for themselves.

Agency Relationship

A contractual relationship where one party (the agent) is engaged to act on behalf of and serve the interests of another party (the principal).

Fiduciary

A person entrusted with the care of another's property or assets who holds a broad responsibility to exercise discretionary judgment solely in the interest of the beneficiaries.

Opportunism (Shirking)

The tendency of agents or fiduciaries to slack off and not expend expected effort when principals are unable or unwilling to monitor their behavior.

Churning

An opportunistic practice where a stockbroker conducts excessive trading in a client's portfolio primarily to generate higher commissions for themselves.

Empire Building

An opportunistic practice where a CEO acquires other companies to increase personal compensation and power rather than benefit shareholders.

Conflict of Interest

A situation occurring when an agent or fiduciary acquires a personal interest that competes with or interferes with their obligation to act in the best interest of another.

Materiality

The standard of disclosure referring to information that a reasonable or prudent investor would consider important when making a financial decision.

Suitability Requirement

The obligation of financial services professionals to recommend securities and products that fit appropriately with a client's specific financial situation and needs.

Twisting

An abusive sales practice where an insurance agent persuades a client to replace an existing policy with a new one solely to generate a commission.

Flipping

An abusive banking practice where a customer is induced to replace an existing loan with a new loan primarily to generate additional fees.

Pre-dispute Arbitration Agreement

A contract clause committing customers or employees to resolve all future disputes through binding arbitration rather than court litigation.

Redlining

The discriminatory practice where banks refuse to issue mortgage loans for homes in distressed areas of a city, accelerating urban decay.

Community Reinvestment Act of 1977

United States legislation passed to combat redlining by requiring banks to help meet the credit needs of all communities within their service area.

Socially Responsible Investment (SRI) Funds

Investment funds that use screening techniques to enable investors to align their financial holdings with social values or ethical preferences.

Negative Screens

Filtering criteria used by SRI funds to exclude stocks of companies producing controversial products (such as tobacco, alcohol, weapons, or nuclear energy) or having poor social performance.

Positive Screens

Filtering criteria used by SRI funds to actively identify and include companies that demonstrate notable corporate social responsibility.

Capital Budgeting

The corporate financial management process of deciding which business opportunities to invest in and determining the allocation of capital among them.

Sarbanes-Oxley Act (Section 406)

A 2002 US law requiring publicly held companies to adopt a code of ethics for senior financial officers promoting honest conduct, full disclosure, and regulatory compliance.

Unique Risk

Firm-specific risk that finance theory considers irrelevant for properly diversified shareholders, as opposed to market or systemic risk.

Strategic Bankruptcy

The deliberate decision by a solvent or struggling company to enter bankruptcy protection to renegotiate contracts, reduce legal judgments, or gain bargaining leverage.

Stakeholder Theory

A corporate governance view rejecting exclusive shareholder primacy, maintaining that a corporation ought to serve the interests of all constituencies with a stake in the firm.