Information leaks inside big banks provide unfair advantage

New study finds equity analysts benefit from insider information

When the Glass-Steagall Act of 1933 was repealed 11 years ago, financial institutions were allowed to engage in commercial and investment activities under the same roof. But a new study finds it’s difficult to maintain an information firewall between those activities when they are housed in the same financial institution.

Once the walls that had previously separated lenders from equity analysts came down, according to new research from Olin Business School at Washington University in St. Louis, information about borrowers (that was private and restricted under Glass-Steagall), began to flow from commercial to equity research divisions within financial conglomerates.

The study “Do Bank-affiliated Analysts Benefit from Lending Relationships?” by Xiumin Martin, PhD, assistant professor of accounting at Olin, and Ting Chen of CUNY Baruch College, is forthcoming in the Journal of Accounting Research.


Martin and Chen’s research finds analysts’ forecasts improve when their banking institution provides loan services to the companies they are following.

Evidence that divisions within large financial conglomerates share information and that bank-affiliated analysts benefit from the information spillover is based on analysis of sample bank loans and analyst forecasts from 1994-2007.

While prior studies have shown that commercial banks have superior information about borrowers, this paper investigates whether banks’ information advantage benefits their affiliated security analysts by helping them make more accurate earnings forecasts.

“Analysts are supposed to be on the public domain side and they are not supposed to get what we call private information, or proprietary information,” Martin says. “All their forecasts should be based on all the publicly available information.”

Martin and her research partner focused on 16 conglomerate banks, including JP Morgan, Bank of America, Credit Suisse and Deutsche Bank, for the period of 1994-2007.

They made a pre- and post-loan comparison in the accuracy of conglomerate forecasts relative to benchmark forecasts issued by the same analysts for firms that did not borrow from the affiliated bank.

Martin found that the accuracy of bank-affiliated analyst forecasts does increase following a loan inception at the same institution. The information advantage of analysts, the study finds, is concentrated among borrowers with high credit risk and negative or bad news related to the company.

The information advantage exists only when conglomerates serve as lead financing arrangers, not merely as participating lenders.

“We think our paper probably will have some policy implications,” Martin says. “The trend towards large conglomerate banks is probably going to persist. Maybe there are some benefits in housing these two divisions within one organization, but our paper provides one piece of evidence that this sharing of information probably is not fair to normal, individual retail investors.”

Editor’s Note: For a .pdf file of the study, email Neil Schoenherr. Professor Martin is available for phone, e-mail and broadcast interviews. Washington University has free VYVX and ISDN lines available for news interviews.