Olin Business School Study Finds Insider Information Helps Analysts at Big Banks
Reference & Education → Education
- Author Melody Walker
- Published June 7, 2011
- Word count 446
A new study from the Olin Business School at Washington University in St. Louis finds it’s difficult to maintain "Chinese walls" - self-regulated firewalls - intended to keep client information from leaking between loan and investment departments when they are housed in the same financial institution.
The repeal of the depression era Glass-Steagall Act 11 years ago allowed financial institutions to engage in commercial and investment activities under the same roof.
The study "Do Bank-affiliated Analysts Benefit from Lending Relationships?" by Xiumin Martin, PhD, assistant professor of accounting at Olin, and Ting Chen of CUNY Baruch College, is forthcoming in the Journal of Accounting Research.
When the walls that had previously separated lenders from equity analysts came down, according to the new study, information about borrowers (that was private and restricted under Glass-Steagall), began to flow from commercial to equity research divisions within financial conglomerates.
Martin and Chen’s research finds analysts’ forecasts improve when their banking institution provides loan services to the companies they are following.
Evidence that divisions within large financial conglomerates share information and that bank-affiliated analysts benefit from the information spillover is based on analysis of sample bank loans and analyst forecasts from 1994-2007.
While prior studies have shown that commercial banks have superior information about borrowers, this paper investigates whether banks’ information advantage benefits their affiliated security analysts by helping them make more accurate earnings forecasts.
"Analysts are supposed to be on the public domain side and they are not supposed to get what we call private information, or proprietary information," Martin says. "All their forecasts should be based on all the publicly available information."
Martin and her research partner focused on 16 conglomerate banks, including JP Morgan, Bank of America, Credit Suisse and Deutsche Bank, for the period of 1994-2007.They made a pre- and post-loan comparison in the accuracy of conglomerate forecasts relative to benchmark forecasts issued by the same analysts for firms that did not borrow from the affiliated bank.
Martin found that the accuracy of bank-affiliated analyst forecasts does increase following a loan inception at the same institution.
The information advantage of analysts, the study finds, is concentrated among borrowers with high credit risk and negative or bad news related to the company.
The information advantage exists only when conglomerates serve as lead financing arrangers, not merely as participating lenders.
"We think our paper probably will have some policy implications," Martin says. "The trend towards large conglomerate banks is probably going to persist. Maybe there are some benefits in housing these two divisions within one organization, but our paper provides one piece of evidence that this sharing of information probably is not fair to normal, individual retail investors."
Melody Walker is the Director of Communications for Washington University of St. Louis’ Olin Business School. Olin offers a Masters in Accounting program at its St. Louis campus.
Article source: https://articlebiz.comRate article
Article comments
There are no posted comments.
Related articles
- The Impact of Hermeneutical Injustice on ASN Students Involved in Transitions from Early Years Education
- IT TAKES A VILLAGE
- Closing the Digital Gap: Overcoming Accessibility Barriers for Students with Disabilities in Benin City
- Expert Quran Teacher for Kids and Adults
- Why is the study of history is critical?
- First Aid Courses and CPR Training - Safety Learning
- A META-ANALYSIS ON THE IMPACT OF CRAMMING AS LEARNING STRATEGIES AMONG SHS STUDENTS IN GHANA
- Revolutionize Your School's Online Presence with a Cutting-Edge CMS Website Development
- How to Find Emotive Language in a Text: A Comprehensive Guide
- Addressing the Rise of Academic Pressure
- Standard Thickness of Asphalt Pavement
- The Importance of Character Education from an Early Age
- Education, Evolution & AI - Mixing Technology and Learning in the 21st Century
- Obtain Full G Driver’s License in Ontario
- Top Tips for Writing High-Scoring University Assignments Insights from Assignment Experts
- Parents Guide to Finding the Best Bay Area Tutoring for Your Child
- The Ultimate Guide to Choosing the Top Driving School in Manhattan
- Gearing Up: Automatic vs. Manual Driving Lessons
- Unified Field Theory Is Explainable
- Project Management in the Digital Age: Leveraging Technology for Success
- Progressing through the Lean Six Sigma Belt Levels: A Journey from White to Black
- A part of Crisis at school: School violence
- Unlocking Success: Why Phonological Awareness Matters for Kids and How to Support It
- Unlocking the Power of Assessment: Strategies for Effective Evaluation
- Unlocking Intellectual Potential: Edinburgh, UK Manuscript Illustrations
- Viruses, structures, causes and prevention
- the importance of stars
- Love and Limits: How to set limits while preserving loving relationships with students
- Unveiling the Potential: A Comprehensive Exploration of "Crushing It With Crypto 2024: UNLOCKED"
- The Evolution of Artificial Intelligence: Past, Present, and Future