Investment Bank Reputation and 'Star' Cultures
The Review of Corporate Finance Studies, Forthcoming
31 Pages Posted: 2 Apr 2011 Last revised: 4 Jun 2013
Date Written: May 29, 2013
We develop a model in which individual and institutional reputation concerns conflict with one another to study why investment bank reputation concerns may have diminished in recent years. Unproven but talented bankers have incentive to signal their ability through actions that may or may not best serve their clients. In the spirit of Kreps (1990), we treat the bank as a hierarchical firm whose only asset is its institutional reputation for curbing behavior that is suboptimal for the client. The conflict between individual and institutional reputation concerns is more likely to resolve in favor of institutional reputation when firms recruit only the most talented people, and less so when unique ability is especially valuable. We discuss how technological change has contributed to a “star” culture that is unfavorable toward preservation of institutional reputation.
Keywords: Trust, reputation, financial institution, professional services firms, star culture
JEL Classification: L14, G20
Suggested Citation: Suggested Citation