Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Investment banking > Ethics and conflict of interest > Flashcards

Ethics and conflict of interest Flashcards

1
Q

How should we judge the ethics of IB/firm?

A
  • what it does
  • the impact it has
  • overall corporate character
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the different theories in business ethics?

A

1) Deontological theories
2) Consequentialist theories (teleological)
3) Stakeholder theories
4) Virtue theories

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are deontological theories?

A

Actions NOT justified by consequences
- judges morality of action based on action’s ADHERENCE TO A RULE
- “bind you to your duty”
- action has intrinsic value that is seperate from consequences

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is an example of a deontological theory?

A

Absolutism of Kant 1778
- actions are inherently moral or immoral regardless of beliefs & goals of individual

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are teleological/consequential theories

A
  • looks at MORAL WORTH of an action
  • robin hood
  • tax authorities, social network
  • what makes an action right or wrong? Determined by GOOD or EVIL that is produced by act NOT ACT ITSELF
  • “ends” analysis prescribed
  • “means to end”
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the utilitarinism

A

Bentham & Mill 1800
- consider best alternative: that what leads to greatest possible good for greatest # people (max total utility)
- promotes welfare by:
minimising harm and/or maximising benefits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are stakeholder theories

A

corporation should be managed for benefit of stakeholders: customers, suppliers, owners, employees, local communities
“stakeholder groups must participate in decisions that substantially affect their welfare” - Freeman 1984

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are virtue theories?

A
  • what is difference between “right” and “wrong”
    grounded in ‘character-centred’ judgements, describe person as good or bad
  • virtue traits of character are the prime function of morality
  • theory deals with:
    type of person one is and the qualities one possesses
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What do most virtue theories take their inspiration from?

A

Aristotles virtues:
1) liberality
2) Courage
3) Temperance
4) Shame
5) Maginificence
6) Pride
7) Good temper
8) Justice
9) Friendliness
10) Truthfulness

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What questions need to be considered in order to analyse: do IBs act in ethical manner?

A
  • Can impacts be appropriately be measured?
  • can the ‘moral worth’ of an action be meaningfully seperated from its consequences
  • what is the basis used to choose between conflicting rights?
  • from what perspective are we looking?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Why are codes of ethics generally considered inadequate?

A

They do not define the principles underlying ethical behaviour.
They are usually not known by employees or effectively ignored.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Name examples of ethical conflicts

A
  • insider dealing
  • market manipulation
  • misselling in m&A advisory
  • unauthorised trading
  • speculation
  • short-selling
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

When did criticism of remuneration start?

A

post 2007/2008 credit crisis.
resulted in higer base salaries and lower bonuses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the implications of bonuses being paid in shares?

A
  • long-term view for employees (incentive to make the shares worth more)
  • may not be sold for long period of time
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Why are bonuses considered bad?

A

They encourage risk-taking and violate ethical behaviour

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are ethical issues in determining bonuses?

A
  • Incentiveses employees to exaggerate contribution to success of deals
  • if they dont put in the same (excessive/unhealthy) effort, they get lower bonuses
  • violates Kant’s categorical imperative (act in appropriate manner)
17
Q

What is the ethical issue with size of bonuses?

A
  • ‘relative remuneration’
  • relationship of employee remuneration relative to other employees and relative to shareholders! (especially with state-funded bank)
18
Q

What are conflicts of interest for analysts in IB?

A

Wihtin the bank:
1) corp fin division:
- underwriters work in interest of issuers and to attract new clients: need analyst coverage and positive recommendations
2) brokerage division:
- analysts work in interest of investors
- given recommodations regarding buy/sell shares
- BUT work to max commission
SO “positive” vs “unbiased” recommendations

19
Q

What is the I/B/E/S

A

Institutional Investor Brokerage System:
widely used database that aggregates and disseminates financial analysts’ earnings forecasts and recommendations

20
Q

How can I/B/E/S lead to herding behaviour?

A
  • Information Cascade (self-reinforcing cycle)
  • Influence of analyst recommendations:
    Pos/neg recomms from analysts: attention
  • Incentive structures: deviating too far from avg forecast can be seen risky/ harm career
  • Anchoring and confirmation bias
21
Q

Why can remuneration of analysts lead to conflict of interest?

A
  • “quality” of recommendation signal
  • importance relative performance
  • can lead to fear: dont deviate from benkmark/house analyst forecast
22
Q

What are the consequences of conflict of interest?

A

1) Recommendation bias:
- affiliated analysts: house broker, PE of IB, related to firm, corp. fin division: more favourable
2) Pre-recommendaton price performance:
- if stock performance poor: postive recommendation (undervalued) to boost price

23
Q

What is strategic bias in earnings forecast?

A

company management manipulate earnings - i.e. to give “surprises”: guide analysts into toning down their forecasts to ensure that actual earnings match/surpass forecasts

24
Q

Where do conflicts of interest in earnings announcements arise from?

A

1) repeated close contacts with management
2) affiliation with underwriter/ib (internally & externally) (lt syndicate deals)
3) holding/owning corporate stock
- to keep current IB clients & attract future business: avoid earnings disappointments

25
Q

What are investor reactions to recommendations?

A
  • if know bias: react - to affiliate recommendations
    i.e. “buy” recom from aff less positive reaction than from nonaff and hold/sell more neg reaction from aff
  • LT p performance: lower returns following affiliated recommendations
26
Q

What are the empirical findings of Lin and McNichols (1998)

A
  • analysts are overoptimistic when issuing ‘hold’ recommendations (avoid sell to maintain client relations)
  • no diff in returns to affiliated and unaffiliated analysts “buy” & “strong buy”
  • no diff in LT returns 1-2 yrs
27
Q

What are reasons for analyst optimism?

A

1) Maintain client relations (conflict of interest):
2) Cognitive bias: hubristic tendency of overconfidence
3) Selection bias (or self-selection bias): company choose analysts that are in favour of company/industry
4) Insider information: good relations with company allows access to material non-public info (info asymmetry)

28
Q

How can conflict of interest be combatted?

A
  • only independent analysts (unaffiliated) (unrealistic)
  • codes of conduct!! (since tech bubble):
  • longer quiet period (25days) (decreases research quantity and impact)
  • enforced division between analyst and underwriters
29
Q

What is GARS?

A

Global Analyst Research Settlement (2001):
Securities Industry Assosciation: ‘best practice’:
1) “ Analyst compensations shouldnt be directly linked to specific IB transactions, sales and trading revenues”
2) “ Recommendations should be transparent and consistent with the analysts fundamental analysis”
3) “ Analysts should be independent observers of industries they follow”
4) “ Analysts should always put customer interests ahead of personal investments”

30
Q

When did NY attorney general begin investigating ML?

A

June 2001:
first $100m (may 2002) and then $100m fine on alleged misconduct by security analyst
- changes monitoring and compensation

31
Q

When did the SEC approve new rules for sell-side analysts?

A

July 2002:
- limited relationship/communication between IB& research dep.
- stringent DISCLOSURE REQUIREMENTS for research reports
- prohibit analyst compensation based on specific IB transaction
- banned affiliated companies from revriewing research report publications

32
Q

When was the GARS and implications?

A

20 Decemeber 2002:
- SEC, NYSE, NASD, NY attorney general & 10 (later 12) US IBs
- severing ties between IB &research departments (physically)
- quiet period 25->40days
- $1.4bn total fines and penalties: $400m Smith Barney, $200m merril lynch, $15m some analysts

33
Q

What was the impact of GARS?

A
  • before: affiliated analysts 22% more likely positive recommendations, this ceased
  • but still reluctant for pessimistic recommendations
34
Q

What did Kadan et al 2009 find?

A

informativeness:
- post-regulation: analysts less optimistic
- “buy” recommendations become more informative (higher pos price reaction)
- “sell” recommendations less informative (less neg price react)
- overall less informative
- investors “reinterprated” neutral (hold) recommendations

Investment banking (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions