| Abstract: | This paper explores the phenomena associated with conflicts of interest, particularly as they pertain to the proprietary trading and brokerage divisions of investment banks. This distinguishes it from past studies, which have researched conflicts of interest between underwriting and brokerage divisions. We examine whether or not an investment bank issues buy recommendations to the market and, at the same time, sells the same recommended stocks through its proprietary trading division, and if so, to what extent this goes on. This paper, therefore, constructs the indices of such conflicts of interest based on weeks, amounts and shares so as to measure the extent of such conflicts of interest using Taiwan’s stock market from January 2000 to December 2003. We obtain the following results. First, conflicts of interest do, indeed, exist, and some investment banks continuously sell (and/or buy no) recommended stocks a few weeks before and after posting their buy recommendations. Second, those investment banks, which are more prone to have conflicts of interest are generally characterized as being smaller in size and issuing more frequent buy recommendations. Third, firms whose stocks are most associated with a conflict of interest typically have a smaller trading volume, are smaller in size, have greater systematic risk, have more insider holdings and are issued recommendations less frequently. Finally, a stock recommendation coupled with a conflict of interest is beneficial to the profits of an investment bank, especially to its brokerage division. |
