Centre for Economic Policy Research

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Contents
List of Conference Participants
ix
List of Figures
xiii
Acknowledgements
xv
Foreword
xvii
Executive Summary
xix
1 What Are the Issues?
1
1.1 Introduction
1
1.2 Information and financial markets
2
1.3 The role of financial institutions in financial markets
3
1.4 What are conflicts of interest?
5
1.5 Why conflicts of interest are important
5
1.6 A framework for evaluating policies to remedy conflicts
of interest
6
1.7 The types of conflicts of interest studied in this Report
9
1.8 Plan of the study
11
2 Investment Banking: Conflicts of Interest in
Underwriting and Research
13
2.1 Information synergies and conflicts of interest
13
2.2 The problem of analysts’ compensation
14
2.3 The IPO boom of the 1990s
16
2.4 Analysts’ ‘excessive’ optimism
17
2.5 Evidence of increasing conflicts in the 1990s
21
2.6 Remedies for the underwriter/analyst conflict of interest
24
3 Accounting: Conflicts of Interest in Auditing
and Consulting
27
3.1 Introduction
27
3.2 The evolution of auditing, standards and regulation
27
3.3 The value of the audit opinion
29
3.4 Conflicts of interest
31
3.5 Separation of auditing and related services
35
3.6 The multi-product audit firm and auditor independence
35
3.7 Litigation risk and rules-based audits
37
3.8 Remedies
39
4 Rating Agencies: Conflicts of Interest in Credit
Assessment and Consulting
41
4.1 Introduction
41
4.2 The role of rating agencies
42
4.3 Beneficiaries of an effective rating mechanism
43
4.4 The evolution of the rating industry
44

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4.5 Do rating agencies add value?
46
4.6 Vulnerability to conflicts of interest
48
4.7 Remedies to conflicts of interest 
50
4.8 Conclusion
54
5 Conflicts of Interest in Universal Banking
55
5.1 Introduction
55
5.2 American universal banking before Glass-Steagall
56
5.3 Investment banking and insurance
57
5.4 Commercial and investment banking
59
5.5 Testing the myths
65
5.6 Contemporary universal banking in the United States
68
5.7 Universal banking and conflicts of interest outside the
United States
69
5.8 Remedies for conflicts of interest
71
6 Overview and Conclusions
77
6.1 When are conflicts of interest a serious problem?
77
6.2 Evaluating remedies
79
6.3 Recommendations
81
Discussion and Roundtable
87
Session 1: Analysts and underwriters
87
Session 2: Auditors and rating agencies
91
Session 3: Universal banking
96
Session 4: Remedies
101
Endnotes
109
References
115
viii Conflicts of Interest in the Financial Services Industry

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