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Ethics in Investment Banking

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Ethics in Investment Banking


Investment Banking Ethics

The issues of ethics in investment banking is becoming more prominent in the United States due to the growing belief among investors that investment banking analysis is biased and untrustworthy.  Investor concerns regarding investment-banking ethics were largely prompted by the collapse of the technology sector, which caused the bankruptcy of many of the new issue technology firms recommended by investment banking analysts.  To some degree, these ethical concerns are also the result of increasing market pressures on investment banks in the wake of banking deregulation, which has permitted commercial banks to engage in investment banking operations.  In recent years, this has significantly increased competition in the investment banking industry.  The industry has relied on self-regulation and the concern of individual firms to maintain a positive reputation in the marketplace as the means to assure investors that their stock recommendations are based on sound and unbiased research.  Because of the growing number of investment banking firms, however, the industry is currently attempting to develop ethical guidelines in order to prevent closer government oversight of investment banking operations.

Investment Banking and the Banker

The investment banker operates as an intermediary between companies that want to raise capital and the marketplace.  Investment bankers do the following:

  1. Their activities generally involve the three broad areas of initial public offerings (IPO) of stock from firms that have not previously sold stock to the public
  2. Secondary issues of stock from firms that are already publicly traded companies
  3. Raising capital for mergers and acquisitions, which can involve both debt and equity issues in the marketplace. 
  4. The investment banker generally analyzes the company and makes recommendations as to how the company should proceed in its quest for capitalization.

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