More conflicts on Wall Street

March 16, 2012

A post by John Asker

Greg Smith’s vocal exit from Goldman Sachs generated an enormous amount of discussion.  One of the issues raised is whether clients understand when their banks are conflicted.  Certainly in some cases they do; see the ruling related to Goldman’s multiple roles in the El Paso sale, which we found via Dealbook.

I won’t comment on whether this is good business practice, but Alexander Ljungqvist and I found that firms issuing public securities often go out of their way to avoid sharing bankers with other firms in the same industry.  Their actions show pretty clearly that they’re aware of the conflict.  One source of evidence is bank mergers, which generate additional conflicts.  We find almost an 80% chance of changing underwriters if a merger results in sharing a bank with a competitor.  For comparison, firms switch only 63% of the time if a merger does not create a conflict, and 50% when there is no merger.  As far as we can tell, these differences do not reflect either sampling variation or selection.

One last thought:  none of this is new.  We used data for the period 1975 through 2003 and found little evidence that the issue has gotten worse.

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