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Institutional investors, behavioural economics and the concept of stewardship

Arsalidou, Demetra 2012. Institutional investors, behavioural economics and the concept of stewardship. Law and Financial Markets Review 6 (6) , pp. 410-421. 10.5235/LFMR6.6.410

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Abstract

This article discusses the aim of the UK Stewardship Code to encourage active participation on behalf of institutional investors. A basic hypothesis in most of the legal literature is that institutional investors behave in accordance with the rational choice model. Consequently, discussions of institutional investors' participation concentrate on market failures but say little about the behavioural aspects of investors. Whilst the article puts forward a number of reasons why the Stewardship Code would not be a momentous step forward, it primarily concentrates on investors' behaviour issues. Such an analysis would be significant because even if market failures were eradicated, there is a further significant reason why the Code will not work: the findings of behavioural economics cast doubt on the capacity of investors to act rationally. A series of psychological or neurological biases cause people to opt for choices that are contrary to their best interests. In accordance with the ideas used by behavioural economists, this article doubts the capacity of the Stewardship Code to succeed, primarily because of its reliance on the notion of rational action by investors. The Code's impact will be relatively small and on the basis of past performance of soft law codes reliant on investor activism, it should therefore be reconsidered whether the intended Code is really necessary.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Law
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
K Law > K Law (General)
Publisher: Hart Publishing
ISSN: 1752-1440
Last Modified: 04 Jun 2017 04:28
URI: http://orca.cf.ac.uk/id/eprint/39773

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