Chinese Walls in German Banks by Lehar and Randl.
The short version? Chinese Walls leak not just in the US but in Germany. This leakage results in affiliated analysts having superior information.
A slightly longer version:
Chinese Walls are supposed to exist. We have seen that time and again in the US. Of course, they leak. This has lead to many changes in regulation. However, it now appears that these walls don't just leak in the United States.
Looking at German Banks, Lehar and Randl find that the walls leak there as well.
A few "look-ins":
- "Officially, banks must establish a Chinese Wall around the research department for two reasons: first, to ensure that analysts do not incorporate confidential insider information in their reports, and second to shield analysts to allow them to work independently."
- The authors "confirm two kinds of leakages through Chinese Walls. First, forecasts from banks owning equity stakes convey superior information. Second, ...evidence of conflicts of interest, resulting in reports with a positive bias."
- "affiliated analysts are, on average, more optimistic than their independent counter-
parts...[and] possess superior information compared to the average analyst"
- "The main contribution of our paper is to document for the first time that bias and increased precision of affiliated analysts are the result of a clear strategy in analysts’ long term behavior. Analysts take advantage of their superior information about firms with close ties to the bank and they seem to balance the goals of having a good track record with the conflicts of interest resulting from the banks’ other business."
Lehar, Alfred and Otto Randl, "Chinese Walls in German Banks", University of Vienna Working Paper, http://www.bwl.univie.ac.at/bwl/fiwi3/members/lehar/analysts.pdf. Accessed on August 22, 2005.