TY  - JOUR
AU  - Mehran,Hamid
AU  - Stulz,Rene M.
TI  - The Economics of Conflicts of Interest in Financial Institutions
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12695
PY  - 2006
Y2  - November 2006
UR  - http://www.nber.org/papers/w12695
L1  - http://www.nber.org/papers/w12695.pdf
N1  - Author contact info:
Hamid Mehran
Federal Reserve Bank of New York
33 Liberty Street
New York, New York 10045
E-Mail: Hamid.Mehran@ny.frb.org

Rene M. Stulz
The Ohio State University
Fisher College of Business
806A Fisher Hall
Columbus, OH 43210-1144
Tel: 614/292-1970
Fax: 614/292-2359
E-Mail: stulz_1@cob.osu.edu
AB  - A conflict of interest exists when a party to a transaction could potentially make a gain from taking actions that are detrimental to the other party in the transaction. This paper examines the economics of conflicts of interest in financial institutions and reviews the growing empirical literature (mostly focused on analysts) on the economic implications of these conflicts. Economic analysis shows that, although conflicts of interest are omnipresent when contracting is costly and parties are imperfectly informed, there are important factors that mitigate their impact and, strikingly, it is possible for customers of financial institutions to benefit from the existence of such conflicts. The empirical literature reaches conclusions that differ across types of conflicts of interest, but overall these conclusions are more ambivalent and certainly more benign than the conclusions drawn by journalists and politicians from mostly anecdotal evidence. Though much has been made of conflicts of interest arising from investment banking activities, there is no consensus in the empirical literature supporting the view that conflicts resulting from these activities had a systematic adverse impact on customers of financial institutions.
ER  -