Chinese Walls in German Banks* |
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Authors: | Alfred Lehar and Otto Randl |
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Institution: | (1) University of Calgary, Canada;(2) University of Vienna, Austria |
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Abstract: | Analysts in a bank’s research department cover firms that have no relationship with the bank as well as companies in which
the bank has a strategic interest. Officially, banks must establish Chinese Walls around their research departments to allow
the analysts to work independently and to avoid the flow of insider information. We examine analyst behavior under long-term
bank-firm relationships using ownership data and analysts’ earnings per share forecasts for German companies from 1994 to
2001. We find evidence that is consistent with analysts reconciling their employers’ interests with their own career concerns.
They seem to use their information advantage strategically by releasing favorable and thereby more precise reports when the
market underestimates earnings. In order not to jeopardize the bank-client relationship, they suppress negative information
when the market is too optimistic. Combining situations where the market over- and underestimates earnings, we can replicate
the unconditional positive bias in analyst forecasts found in the previous literature. Despite the bias in affiliated analysts’
forecasts, they nonetheless selectively communicate valuable information to investors.
*We gratefully acknowledge the contribution of I/B/E/S International Inc. for providing earnings per share forecast data.
This data has been provided as part of a broad academic program to encourage earnings expectations research. We thankfully
acknowledge financial support from the Austrian National Bank (OeNB) under the Jubil?umsfonds grant number 8523. We thank
Werner Antweiler, Michael Halling, Helmut Elsinger, Evelyn Hayden, Greg Hebb, Cornelia Kullmann, Kai Li, Colin Mayer, Stefan
Pichler, Duane Seppi, Alex Stomper, Neal Stoghton, Michael Stutzer, Suresh Sundaresan, Yishay Yafeh, Josef Zechner, Christine
Zulehner, an anonymous referee, and seminar participants at UBC, the Northern Finance Association meetings, the Western Finance
Association meetings, and the European Finance Association meetings for helpful comments and Eva Smolen for excellent research
assistance. |
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