Investment Banking Firms Research Articles

Turning a blind eye: The complicit trespassing of ‘Chinese walls’ in financial institutions in New York

This article examines the ways in which ‘Chinese walls’ – that is, information barriers within financial institutions – are constituted and subverted by acts of trespass within large investment banking firms in New York. While Chinese walls positively serve to prevent corruption and fraud, they simultaneously attract legal, semi-legal and illegal forms of trespassing. My analysis shows that some trespassing is based on non-verbalized and embodied exchanges of information that are not in and of themselves illegal. Referred to as playing ‘the game’, the result of these forms of trespass is that the Chinese wall becomes an ‘effect’ or fiction. At other times, trespassing can cause inconvenient suspicion, encouraging those who operate amid these walls to participate strategically in various aspects of wilful blindness. Together, these examples reveal the conceptual and material relationships between ‘seeing’ and ‘knowing’, thereby highlighting the complexity of information flows in financial institutions and demonstrating how the critical regulation of financial capitalism is sometimes weakened.

Will Law Firms Go Public?

Law in the United States is a big business and big law firms are a global business. Currently, under rules of the American Bar Association (ABA) and most states law, firms are not allowed either to include non-lawyers as partners or accept equity investments from non-lawyers. This Article will argue that (even if law firms retain the form of partnerships) they eventually will accept investments from third parties, and possibly even go public, but this development could lead to a loss of professionalism, as it has with other industries, and could also lead to the end of self-regulation. Among the matters discussed are: legal ethics rules regarding law firm organization and the work of the ABA Ethics Commission; the changes to the regulation of lawyers in the United Kingdom, Australia and elsewhere; and litigation attacking current ethics rules regarding outside investments in law firms. Also, this Article will consider the evolution of other industries, and in particular investment banking firms, from closely held partnerships to large public companies, and will speculate about the future of the legal profession.

A Perplexed Economist Confronts 'Too Big to Fail'

This paper, written for a conference at the Fordham University Law School, examines various facets of the “too big to fail” debate. It notes that in the current context, “too big to fail” may imply systemic risks from large financial institution size, compensating economies of scale, political power, and (within narrower markets) power to set prices above competitive levels. It examines three stylized facts: the contours of the recent merger wave among financial institutions, the concomitant increase in the concentration of financial institution assets, and the impressive rise in financial institutions’ profits as a share of all U.S. corporate profits,. It argues that rising aggregate concentration of financial institutions’ assets may imply rise in the power to set above-competitive prices in individual relevant banking markets – i.e., in segments of what economists call “product characteristics space.” There is not much solid economic evidence on this last conjecture for investment banking firms, but supporting evidence from the large number of studies focusing on commercial banks is marshaled. The evidence on economies of scale is also imperfect, but it implies that breakup of the largest banks need not cause great efficiency losses.

Immigrant Entrepreneurs in U.S. Financial History, 1775-1914

Throughout its history, the United States has been the beneficiary of a worldwide in-migration of entrepreneurial talent. This article surveys finance, one of the many sectors in which immigrants made a conspicuous impact. Part I demonstrates the dominant role of immigrants in forming public financial policies from 1775 to 1817. Part II surveys 12 merchant and investment banking firms founded during the nineteenth century by individual immigrants or family groups, and traces their histories until 1914. Part III suggests, from this small sample, a series of hypotheses and tentative conclusions about their experiences and influence. Part IV compares the financial environment of the nineteenth century with that of the late twentieth and early twenty-first centuries. The article ends with a supporting appendix that describes 19 additional immigrants or immigrant families and their firms.

The SEC After The Financial Meltdown: Social Control Over Finance?

2008 was not a good year for the Securities and Exchange Commission (SEC). In December, the revelation of Bernie Madoff’s massive Ponzi scheme focused attention on the agency’s failure to detect this long-running fleecing of investors. In September, SEC Chairman Christopher Cox ended the Consolidated Supervised Entities Program after three of the investment banking firms in the program disappeared and the remaining two converted to bank holding company status. The change seemed to expose the SEC as a weak prudential regulator as compared to the Federal Reserve. During the year, as various proposals for financial reforms swirled, it often seemed like the SEC was headed for the dustbin. The focus was on systemic risk and the consolidation of regulation which focused attention away from the SEC and towards the Federal Reserve as the regulator of choice. It looked like a game of musical chairs in which the SEC was slow to find its place.

State of New York versus ten investment banks

PurposeTo test and compare how the value of ten major investment banking firms was affected by the announcement in April 2002 of an investigation by the New York State Attorney General's office and by the announcement of a settlement between the Attorney‐General's office and the indicted firms in December 2002.Design/methodology/approachPresents a hypothesis that the defendant firms would experience greater negative returns on the announcement day than on the settlement day, describes method of data collection and analysis, and draws conclusions from the results.FindingsAnnouncement of the anti‐fraud investigation was more value‐depleting than announcement of the punitive settlement. The decline in the defendant banks’ share prices over the following year was correlated with the amounts of their punitive settlements.Originality/valueWhile primarily a corporate finance study comparing the effects of the announcement of the investigation and of the final settlement on the securities firms’ share prices, also shows how the alleged infractions affected the firms’ shareholder values.

Spinning in a Hot IPO: A Matter of Business Ethics

Spinning is a story that has been around for a while, although there has been considerably more interest in the practice of spinning following recent revelations in the financial press that well-known investment banking firms, such as Credit Suisse First Boston and Salomon Smith Barney, engaged in questionable spinning activity in the late 1990's. One very high profile example, which is the subject of ongoing Congressional and regulatory scrutiny, concerns the spinning practices of Salomon Smith Barney during the hot IPO market of the late 1990s. The WALL STREET JOURNAL has recently reported that in the late 1990s Salomon allocated shares of various hot IPO's in which it served as lead underwriter to the personal trading account of Bernard Ebbers, who was then serving as CEO of WorldCom. This Article analyzes the responsibility and accountability of the underwriter (Salomon) and the executive (Mr. Ebbers) for their involvement in this reported spinning activity. The Article proceeds along two distinct but related lines of inquiry. The first, which has tended to dominate public debate to date, relates to the culpability of those investment banking firms who made the hot IPO allocations. The second, and in many ways more interesting dimension to this story, is the analysis of the culpability of the corporate executive who received the hot IPO allocation. Although the principal focus of my Article is the conduct of the corporate executive, an analysis of the underwriter's potential liability for its spinning activity provides the framework that is necessary to understand the responsibility of the corporate CEO who in turn accepts the hot IPO allocation from the underwriter. The story of spinning offers a fascinating study of the excesses of managerial conduct that grew out of the bull market of the 1990's. In the end, I conclude that the lessons to be learned from the story of spinning serve as a poignant and powerful reminder of the important and influential role that the law of fiduciary duty continues to play in shaping and monitoring standard of fair and ethical conduct that investors can reasonably expect of modern corporate managers. Just as importantly, by framing the doctrine of corporate opportunity to include the CEO's allocation of hot IPO shares from the company's investment banker, the law of fiduciary duty serves the important public policy goal of holding these CEOs accountable for the responsible exercise of power and influence that inevitably comes with the position of CEO of a public company in today's business environment.

Investment Bank Reputation and the Underwriting of Nonconvertible Debt

We examine the impact of investment banker prestige on underwriter spreads, offering yields, and other expenses for 2,449 nonconvertible industrial debt issues offered during the period 1990 to 1997. We find that higher prestige underwriters charge significantly lower underwriting fees. Offering yields are also lower and offering prices are higher for prestigious underwriters, which indicates that investment banker reputation acts to certify the value of a debt issue to investors. Other issuance expenses paid by the issuer are also lower for debt underwritten by the more prestigious investment banking firms. Lastly, we show that repeat business with the same investment banking firm leads to lower underwriting fees but does not significantly affect “other expenses” paid by the issuer.

Information-seeking behavior of securities analysts: Individual and institutional influences, information sources and channels, and outcomes

Information technology and the need for global information are constantly changing the way securities analysts, one kind of knowledge worker, obtain, manipulate, and disseminate information. This study develops and tests a general model, with specific hypotheses, that individual characteristics and institutional resources influence the information sources and communication channels that individuals use, that use of these sources and channels influences the outcomes of analysts' activities, and that, therefore, individual characteristics and institutional resources both directly and indirectly influence the outcomes. The data for this study were collected through a telephone survey administered to a random sample of 100 securities analysts from 40 of the largest investment banking firms in the United States and the United Kingdom. The results show that individual characteristics have little influence on the information sources and communication channels used by analysts, and thereby do not have a significant influence on the outcomes of analysts' information activities. Institutional resources do have a significant influence on the information sources and communication channels analysts use, but also have a direct influence on outcomes, and thereby play a significant role in analysts' information activities. The conclusion discusses implications of these findings for securities analysts, institutional and retail investors, schools of library and information science, and practicing information professionals. © 1997 John Wiley & Sons, Inc.

The Benefits of Dynamically Hedging the Toronto 35 Stock Index

AbstractA growing number of studies reveal that the performance of dynamic hedging strategies tends to vary across markets, producing large percentage reductions in variance in some and seemingly small reductions in others, relative to constant hedges. This paper examines the hedging effectiveness of Toronto 35 index futures and shows that the application of a dynamic strategy based on a general, bivariate GARCH(1,1) process yields economically significant in‐sample and out‐of‐sample improvements in risk reduction, compared to static hedging strategies.RésuméUn nombre grandissant d 'études révèle que la performance de stratégies de contrepartie dynamiques varie d'un marché à l'autre, produisant dans certains cas des pourcentages de réduction de variance appréciables et, dans d'autres cas, de faibles réductions de variance par rapport à la stratégie statique. Cet article examine l'ef‐ficacité de contrepartie du contrat à terme boursier sur l'indice Toronto 35 et démontre que l'application d'une stratégie dynamique reposant sur un modele GARCH(1,1) bivarié général permet de reduire la variance defaçon significative, sur le plan économique, par rapport au modèle de contrepartie statique et ce, aussi bien à l'interieur qu'à l'extérieur de l'échantillon.

Investment firms to buy Sterling Chemicals

Sterling Chemicals—a Houston-based company that put itself on the block in January—has reached a definitive agreement to sell the company to two investment banking firms. The deal could spark a bidding war with Huntsman Corp., another potential purchaser. The two firms are Sterling Group, also based in Houston, and the Unicorn Group of Cranford, N.J. They are offering shareholders $12 per share in cash or in a combination of cash and securities, in a deal worth a total of at least $668 million. At press time, C&EN was unable to obtain an explanation from Sterling Chemicals, Sterling Group, or Unicorn as to why this offer is superior to a $12-per-share bid for Sterling Chemicals made April 15 by Salt Lake City-based Huntsman. Indeed, Jon M. Huntsman, chairman and chief executive officer of Huntsman, complains that Sterling Chemicals did not allow his company to perform a due diligence review of Sterling Chemicals' books that was set ...

Performance effects of cooperative strategies among investment banking firms: A loglinear analysis of organizational exchange networks

Abstract This study analyzes mutual influence processes between relational strategies and organizational performance in cooperative exchange relationships among investment banks distributing new stock issues during 1980–1989. Performance effects of actor expansiveness, partner popularity, and dyadic reciprocity are tested with loglinear models of dyadic interactions. Findings indicate that a strategy of expansiveness increases the long-term performance whereas a strategy of popularity decreases it, and that reciprocal exchanges on a relative resource basis payoff in the long run.

Foreign Experts, Capitalists, and Competing Agendas

This article examines privatization and privatization ministries in Poland, Czechoslovakia/the Czech Republic, and Hungary, stressing the comparability of these organizations and the context in which they originated. The author focuses on the activities and agendas of foreign experts employed or retained by ministries of privatization and the programs they supported. She assesses the degree to which outcomes to date approximated a neoliberal economic agenda of rapid privatization. She distinguishes between (a) opposition to rapid privatization agendas that can be identified with “Leninist legacies” or distributional coalitions attached to the satae industrial sector and (b) promoters of privatization who may work at cross-purposes with supporters of rapid privatization agendas, in particular investment banking firms assisting ministries of privatization. The purpose of the analysis is to suggest the range of capitalist activities surrounding privatization that are emerging in Eastern Europe, adding a further dimension to the dichotomy of Leninist legacies versus “liberal imperatives.” Whether or not enterprise insiders or neoliberal agendas have the upper hand, it most certainly is capitalism that is emerging.

Informational externalities of seasoned equity issues

Abstract We examine share-price reactions of commercial bank common stock issues and find negative effects on rival commercial and investment banking firms. In comparison, we find no such intra-industry effects for equity issues by industrial firms. Our results support theoretical models in which bank loan portfolios impound asymmetric information about client firms, so that adverse individual bank announcements generate external information effects on other banks. A policy implication of these results is that regulatory pressures applied to individual banks induce spillover costs for the commercial and investment banking industries. Our evidence also indicates that the legal separation of commercial and investment banking activities is artificial.

Valuation Of Privately-Held Companies: A Survey Of Investment Banking Firms

Valuation Of Privately-Held Companies: A Survey Of Investment Banking Firms

An Empirical Examination of Investment Banking Merger Fee Contracts

Investment banking firms have traditionally occupied an important position in U.S. capital markets. The financial services which they provide (underwriting, market making, advice on capital structure, dividend policy, mergers, acquisitions, and divestitures) no doubt enhance the liquidity and informational efficiency of the primary and secondary markets. While other financial institutions can provide some of these same services, investment banking firms appear to have a significant comparative advantage due to their specialization and expertise in corporate financial matters and their ability to gather and process capital market information quickly and at low cost.' Thus, one would expect the fundamental benefit of financial intermediation, i.e., the reduction in transactions costs, to extend to the market for corporate control. In spite of the benefits which investment bankers can bestow on merger markets, their involvement in the mergers market has come under increased criticism in recent years. This criticism has been aimed at the fees charged for providing merger services. The disenchantment expressed by corporate executives has grown in parallel with the size of investment banking merger fees at the leading Wall Street firms. In fact, it is reported that some major corporations are seeking to by-pass investment bankers as merger intermediaries altogether in favor of a do-it-yourself approach.2

The role of investment banking firms in managing water project financing

Volatile debt markets and current economic conditions have affected financing of water utility projects radically. Investment banking firms can help plan bond issues, market the issue to investors, evaluate the suitability of innovative financing techniques, and provide ongoing strategic financial planning for water utilities.

ECONOMIC IMPLICATIONS OF MULTIPLE RATES OF RETURN IN THE LEVERAGED LEASE CONTEXT

TRADITIONAL CAPITAL ASSET yield evaluations are developed primarily for situations in which a negative outlay is followed by a series of future positive inflows with a sum greater than the initial outflow. The problems relating to the evaluation of more complex situations involving losses before termination were observed by Lorie-Savage [71], and Solomon [13], as a paradox leading to dual rates of return. Teichroew, Robichek, and Montalbano [15, 16] explored the mathematical implications of multiple rates of return for projects with mixed characteristics and proposed a generalized analytical procedure for solution.' The multiple rate of return problem usually occurs only in rare instances. A leveraged lease, however, is a mixed project which is no longer an unusual situation. Leveraged leasing is gaining an increased importance in the financial community. Many large banks, investment banking firms, leasing companies, and large corporations are engaging in it either as a source of funds, or as an investment. Unfortunately, the standard analysis calculates an internal rate of return for the general leveraged lease situation, which may not be consistent with the firm's cost of capital or yields on other investment opportunities. It is the purpose of this paper to explore the fundamental financial implications of the leveraged lease, demonstrate the inadequacies of the traditional computational techniques, and formulate a reliable method for the calculation of a meaningful yield on the participant's equity investment.

The Evaluation of a Hospital as a Long-Term Borrower

THERE is no area of private financing in the United States which will in the next five years undergo as much change and development as will the financing of voluntary non-profit hospitals. represent the last major established industry in the country for which traditional methods of evaluation, bond quality rating and financing have not been thoroughly established. Until the past two years, major Wall Street investment banking firms showed only passing interest in financing hospitals. For example, in 1969, four of Wall Street's most respected large investment banking firms formed a consortium to arrange long-term financing for hospitals. Two other major underwriters, that professed skepticism about the credit worthiness of hospitals early in 1970, had by September 1970 underwritten a major hospital tax-exempt bond issue. Standard and Poor's Corporation, a well established bond rating agency, began in 1969 to rate hospital bonds. There is good reason for these developments. desperately need massive amounts of private financing to modernize their facilities in order to meet the nation's goal of making health care the right of all citizens, rather than the privilege of a few. At the present time, health care ranks third largest as an employment industry behind agriculture and construction.1 According to an article in Hospitals Journal of the American Hospital Association, the total investment in hospitals required by 1975 will be $48 billion-an increase of $14 billion over estimated 1970 assets of $34 billion.2 Another source, the Department of Health, Education and Welfare, estimates that the industry will require a further investment of $20 billion over the next three to five years.3 At their present rate of growth, hospitals. will account for 7 per cent of the nation's gross national product by 1975. It is not the apparent intention of the federal government to m-eet the hospital's capital needs directly. Rather, the government has encouraged hospitals to borrow privately. The government has, at the s.ame time, increased the feasibility of private financing by paying patients' bills via Medicare and Medicaid. The result has been to make the. federal government, rather than the patient, responsible for hospital receivables, with dramatic effect on hospital credit. The passage of Medicare and Medicaid began a new era in American hospitals. These two programs created demands for medical care well beyond the expectations and capacity of hospitals by making treatment available to large segments of the population which had never before in the history of the country had access to good medical treatment in such quantity. were not prepared for the demand. In the late 1960's, the Department of Health, Education and Welfare estimated that over half of the GORDON H. BERG is Chairman of Sprague Medical Systems Corporation in Boston. He was formerly an officer of the New England Merchants National Bank of Boston. 1. Footnotes appear at end of article.

Patterns in Investment Research

J NVESTMENT RESEARCH, one of the youngest professions with academic and scientific background, has gone quite a way in the brief span of the last quarter century. Its theories and techniques, hammered out in the fierce crossfires of cyclical ups and downs, have justified themselves sufficiently and have given the profession a standing of indispensability. Today large research departments are maintained by banks, insurance companies, investment banking firms, portfolio counselors, investment trusts, large brokerage houses. Some of these organizations are known to apply to investment research sums in hundreds of thousands of dollars annually, and these people can truly say that, if the answer can be gotten at all, their time and money are in to get it. A great deal in the theoretical structure and in the methodological approach of investment research moves in a zone of flux that can have considerable latitude. In fact, the character of the tool and of the material with which it operates, as well as the nature of its objectives, does require a definite flexibility and responsive adaptability to the changing impulses of the innumerable cyclical and secular variables. Of course, aging will make it more seasoned and less experimental. Schools of thought in investment research vary more than those in ordinary, less speculative, technical and scientific pursuits. Although variances may not be fundamental, investment research activity among the various organizations that foster such work may show considerable individuality, particularly in the emphasis of one or the other of the various determinants that enter in investment problems.