Final answer:
Investment research activities are often criticized due to failures in corporate governance and imperfections in information distribution. New regulations aim to mitigate these issues, but they can be controversial. Ensuring complete and accurate information is crucial for the functionality of financial markets.
Step-by-step explanation:
Rules governing investment research activities have been critiqued due to various deficiencies related to corporate governance—a force that is supposed to oversee top executives and ensure accurate dissemination of company information. However, situations like those involving Lehman Brothers have highlighted failures within these institutions, leading to a lack of accurate information available to investors. An underlying problem is imperfect information, where there is an unequal distribution of knowledge between company insiders and outside investors.
Firms typically have more information about future profits and risks, while shareholders may not be incentivized enough to nominate board members who could potentially enhance transparency and corporate governance. Additionally, new regulations attempt to address these issues, such as increasing the regulatory powers of entities like the Federal Reserve Bank, but these too can be met with controversy and resistance.
One important aspect of addressing the inadequacies in investment research activities lies in understanding market failure and the consequences of inadequate information. Self Check Questions within educational resources probe into the concept of market failure, the problem of inadequate competition and information, and the implications of immobile resources. It's critical for the effectiveness of financial markets that all participants have access to complete and accurate information, ensuring a level playing field for investors.