Traders vs. Relationship Managers: Reputational Conflicts in Full-Service Investment Banks
55 Pages Posted: 21 Dec 2012 Last revised: 24 Oct 2013
Date Written: October 20, 2013
We present a model that explains why investment bankers struggle to manage conflicts of interest. Banks can build a type reputation for technical competence by performing complex deals that may not serve their clients' interest; on the other hand, banks can sustain a behavioral reputation by refraining from doing so. A behavioral reputation is a luxury reserved for banks that have proven their abilities. The model sheds light on conflicts between the trading and advisory divisions of investment banks, as well as the consequences of technological change for time variation in the relative strength of behavioral- and type-reputation concerns.
Keywords: reputation, investment banking, conflicts of interest
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