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Financial institutions are facing substantial problems fromfinance theory, and the main challenge can be informational asymmetries (IS)that stem form adverse selection (AS) and moral hazard (MH). The financialintermediaries can reduce different requirements between lender and borrower,and transaction costs. Also the IS can mainly be solved by the four basicfunctions of financial intermediaries: screening, monitoring, verification andenforcement. However, AS and MH still seem hard to eliminate due to the ‘free-rider’problem, this enables investors to invest in information. Moreover, that forcesfinancial intermediaries to evolve, and to provide more detail information andto enhance their service to be unique for clients, thus continuouslymaintaining competitive advantages. Therefore, financial institutions ought tobuild different organisational structures, generate more intangible assets suchas off-balance sheet, liabilities, information and knowledge, and idiosyncraticinvestment strategies in order to outperform their competitors or potentialcompetitors. Nevertheless, these will remain existence of IS, thus it isnecessary to seek effective methods of reducing IS, and to improve finance andintermediation theory adopted in financial firms.
Coleman and Zéghal and Maaloul argued that the quantitativeresearch sometimes omits values on intangible assets, even though it shows thatfinance theory plays a role in the financial industry. Moreover, the fieldresearch (Chen et al.) provides a new idea for improving the financialinstitutions by rethinking the previous grounded theory with amended insights.They suggest that firms ought to pay more attentions on resources ofintangibles, which can promote institutions’ financial performance, businessmodels and process of innovation, to achieve competitiveness in markets.Meritum and Kalemli-Ozcana et al. suggested that both tangible and intangibleassets are important to institutions, but intangibles such as relationship,knowledge, information, reputation, power and so on, can mainly affect thelong-term development of institutions, because tangibles are visible and easyto be imitated by competitors. Therefore, institution managers and analysts areexpected to disclose more intangible resources in order to maintain continuingcompetitive advantage. However, Chen et al. imply that there are communicationbarriers between managers and analysts due to the different views onintangibles. Specifically, managers are more familiar with their firms, andthey are reluctant to report intangible assets in detail. That narrowsanalysts’ access of receiving information, resulting in accuracies of analysis.Holland indicates that the behaviour of managers and analysts generates a‘blind-spot’ on information, leading to an illusion of efficient market.Additionally, knowledge is more likely to impact understandings on tangiblessuch as technology, and process of decision-making and innovation in a firm.
As mentioned above, IS seems difficult to be mitigated dueto the communication gaps and misunderstandings on intangibles. Meritum suggeststhat intellectual capital, which comprises human capital, relational capitaland structural capital, can improve institutions’ financial performance andorganisational processes. Additionally, Chen et al. and Volberda et al. demonstratedthat knowledge is a key factor that influences contextual conditions, and itfosters different individual competences and behavioural characteristics infirms. Therefore, methods like effective training and communicating willpossibly bring the contextual conditions into a healthy level. Moreover, Colemanand Volberda et al. indicated that external environment could impact changes ofknowledge as well as firms’ internal conditions. For instance, the Sub-primeCrisis broke down the global financial system and changed public perceptions onmarkets, and then increased shifting risk and failures of bank and financialinstitution. Apart from this, Berger and Udell declared that causal conditions,which could lead management to change decision-making and business strategies,ought to co-evolve with contextual conditions in a firm. For instance, thedevelopment of technology provides institutions an opportunity to deliver theirproducts and services to customers via various channels, and it also offers chancesof reducing transaction costs and stimulating evolution of innovation. Hence,financial institutions enhance the processing of information, and process ofdecision-making, sense-making and value creation through the advantage ofresources of intangibles.
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