Abstract

In standard asset pricing theory, investors are assumed to invest directly in financial markets. The role of financial institutions is ignored. The focus in corporate finance is on agency problems. How do you ensure that managers act in shareholders’ interests? There is an inconsistency in assuming that when you give your money to a financial institution there is no agency problem but when you give it to a firm there is. It is argued both areas need to take proper account of the role of financial institutions and markets. Appropriate concepts for analyzing particular situations should be used. 1 DO FINANCIAL INSTITUTIONS MATTER? When I was an assistant professor my view on referees was that nine out of ten of them were complete idiots. They obviously had no idea what my papers were about or they wouldn’t have rejected them. Fortunately the remaining one out of ten was astute and sometimes would actually recommend a revise and resubmit. Over the years I learned where the problem lay and it was not with the referees. By the time I was an editor my opinion on referees had been reversed and I realized how much they could

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