The Economics of Conflicts of Interest in Financial Institutions

Hamid Mehran and René Stulz

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: 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.

Date: 2006-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.cob.ohio-state.edu/fin/dice/papers/2006/2006-21.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.cob.ohio-state.edu/fin/dice/papers/2006/2006-21.pdf [301 Moved Permanently]--> https://www.cob.ohio-state.edu/fin/dice/papers/2006/2006-21.pdf [301 Moved Permanently]--> https://fisher.osu.edu/fin/dice/papers/2006/2006-21.pdf)

Related works:
Journal Article: The economics of conflicts of interest in financial institutions (2007)
Working Paper: The Economics of Conflicts of Interest in Financial Institutions (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2006-21

Access Statistics for this paper

More papers in Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().