Power and conflicts of interest in professional firms: Evidence from investment banking

Abstract

We study the resolution of conflicts of interest that arise when actors in professional firms represent separate parties with competing interests, using models of power and reputation to predict the resolution of such conflicts. We tested models on an initial sample of over 8,000 security analysts' ratings of corporate equity securities. Results show that analysts rate their clients' securities more favorably than other analysts rating the same securities. This positive bias is moderated by the reputation of the analyst and his or her department. Implications and extensions for organizational theory, multiservice professional firms, and security market regulation are discussed.