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Corporate Governance and Control

I need help in answering the following questions:

1) How does the capital market affect corporate governance?

2) What happens when internal corporate control fails?


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Interesting questions! One approach is to look at information from various sources, which you can draw on for your final copy. This is the approach this response takes.

Let's take a closer look.

1) How does the capital market affect corporate governance?

A capital market is a market where debt or equity securities are traded.

In other words, Capital Markets are the means by which large amounts of money (capital) are raised by companies, governments and other organizations for long term use and the subsequent trade of the instruments issued in recognition of such capital. New money is raised in the Primary market (e.g. a market in which securities are initially issued) by issuing shares or bonds to investors who can then trade them on the relevant Secondary market.

Secondary Market is the market place for trading in securities that are not new issues. This is different to the market that deals in new issues. The vast majority of share dealing is done in secondary markets. The presence of secondary markets means that new issue shares on primary markets are much easier to sell, as there is a secondary market available in which to sell the shares.

Surely corporate governance and capital market governance should never have been separate and distinct disciplines? Internal controls must surely have always embraced all aspects of capital market security. By definition, then, capital market affects corporate governance directly, as capital market governance is part of the overall corporate governance process. Since capital market governance impacts overall business performance, the capital market impacts corporate governance through the types of contracts, organizational designs and legislature implemented in order for corporate owners to secure/motivate the corporate manager to deliver a competitive rate of return, based on the following definition of corporate governance:

"Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive ...

Solution Summary

Explanation of how does the capital market affect corporate governance and what happens when internal corporate control fails. Supplemented with two articles on capital market and corporate governance.