Government Intervention In Business Essay

992 Words 4 Pages
At the beginning of the 20th century, the rise of monopolies forced governments to enact anti-trust legislations in order to maintain a free market. Since then, the amount of government intervention in business has grown exponentially. In recent times, fraud and moral hazard have caused a focus on corporate governance legislation. Regrettably, ethics cannot be legislated, and government intervention only hurts businesses which conduct themselves properly while doing nothing to mitigate new forms of unethically-designed financial engineering.
As new financial instruments are developed, globalization increases, and unprecedented macroeconomic environments are encountered (e.g. extremely low interest rates), opportunities for unethical
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GM’s management is focusing on stakeholders while ignoring shareholders. Can a company that does that in the long run succeed? Maybe with the help of government funds. It’s not surprising that government involvement has actually degraded corporate governance.
Furthermore, the generalized regulations created by government agencies are impractical to small businesses. Chhaochharia and Grinstein (2007), Engel et al. (2007), and Zhang (2007) (cited in Bruno & Claessens, 2010) find that “the adoption of the Sarbanes–Oxley Act in the US hurt small companies’ performance, did not have significant effects on companies with good corporate governance practices in place, and encouraged companies to go private.”
Even regulations designed only to improve corporate governance can be counterproductive. Extensive shareholder monitoring and intervention regulations may actually amplify the principal-agent problem. If an executive can be dismissed at the slightest decrease in earnings per share, will he accept a positive NPV project that is cost-loaded at the beginning? Although accepting it would be best for shareholders, it might be too dangerous for him.
A study by McKinsey and Company (2002) found that “an overwhelming majority of investors are prepared to pay a premium for companies exhibiting high governance standards. Premiums averaged 12-14% in North