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Beneficial wrongdoing

Negative media coverage of investment bank conduct around the financial crisis actually increased their likelihood of IPO invitations because it signalled shared values to corporate customers, finds new study at Cambridge Judge Business School.

Classic architecture details of a bank building.

Ever since the financial meltdown a decade ago, many commentators have bemoaned what they perceive as a disconnect: a lack of consequences for most investment banks despite widespread public disapproval of conduct that contributed to the crisis.

A new study at Cambridge Judge Business School, forthcoming in Human Relations (the journal of London’s Tavistock Institute of Human Relations), looks at one aspect of this: comparing media coverage of investment banks to the likelihood they will be invited to run lucrative initial public offerings (IPOs).

The study concludes that negative coverage actually helped banks gain IPO business from corporate customers, as those corporates view certain banking practices widely criticised after the financial crisis (such as appetite for risk, short-termism and big bonuses) as consistent with industry norms, thus suggesting quality of service.

Thomas Roulet
Dr Thomas Roulet

“This study shows how divergence in audiences’ perception of typical industry behaviours can make wrongdoing beneficial,” says the paper authored by Dr Thomas Roulet, University Senior Lecturer in Organisation Theory at Cambridge Judge Business School. “Most audiences tend to disapprove of wrongdoings, but specific stakeholders may interpret this disapproval as an indication of the focal organisation’s level of adherence to professional norms.”

“Our findings show that the more banks are disapproved for their wrongdoings, the more likely they are to be selected to join a syndicate” for new IPOs. “This study suggests that the coverage of misconduct can actually act as a positive signal providing banks with incentives to engage in what is broadly perceived as professional misconduct.”

The mixed-method study was based on the organisational studies concept of “institutional logic”, or how broader practices and beliefs shape behaviour.

The study included both qualitative interviews with investment bankers and their stakeholders, and a quantitative analysis of the effect of media disapproval on IPO syndicate invitation. This second part found that the likelihood of a given bank being invited to join IPO syndicates increased if that bank received negative press coverage – all other things being equal – while controlling for factors such as the bank’s size, business lines, past performance in a specific market, and the issuer’s sector and location.

The paper is entitled entitled “Sins for some, virtues for others: media coverage of investment banks’ misconduct and adherence to professional norms during the financial crisis”.

The study examined 3,503 IPOs and a total of 5,147 IPO invitations from 2007 to 2011 (a period before, during and after the financial crisis), and media coverage in the same period based on 70,000 articles in three leading US media outlets – The New York Times, The Washington Post and The Wall Street Journal – on 28 investment banks representing nearly 90 per cent of invitations to join an IPO syndicate as an inner circle “book runner”.

The media coverage was evaluated based on a list of 204 words built on a qualitative analysis of a sample of opinion articles. The articles were then coded on the basis of how those words were associated with the banks. The words were grouped into four factors that have been heavily criticised since the financial crisis:

  • Greed: words such as “obscene”, “excess”, “selfish”, and “shameless”.
  • Violence as in a battleground: “assault”, “frenzy”, “vicious”, “fierce”.
  • Opacity as in fostering secrecy: “covert”, “cryptic”, “dubious”, “hazy”.
  • Risk-taking behaviours: “casino,” “tempt”, “daring”, and “gamble”.

The study does not look at how often a bank is covered in the media – because the more prominent the bank, the more likely the media will scrutinise it and associate it with industry misconduct – but rather the degree of disapproval or the nature of coverage as measured by the articles’ density of the 204 key words and their association with the banks.

The study does not name individual banks, as Dr Roulet explains:

“Practically all investment banks in the sample suffered some hostility from news outlets at some point in time during the financial crisis, so we decided not to single out specific banks in the paper itself.

“But we saw a clear pattern: banks identified in negative news articles were more likely to be picked for IPO syndicates in the following months, everything else being equal. For example, there was a big relative spike in IPO invitations for banks named in a harshly critical report on big bonuses issued in 2009 by Andrew Cuomo, then the attorney general of New York, and the same pattern holds when only one bank was criticized in media articles.”

The Cuomo report – entitled “No rhyme or reason: the ‘heads i win, tails you lose’ bank bonus culture” – focused on nine big banks that were original recipients of the Troubled Asset Relief Program in the US, detailing how many employees at each bank received bonus payments above $1 million, $2 million and $3 million.

The paper by Dr Roulet identifies client capture as a key reason why negative press coverage has not dented investment banks’ IPO participation: investment banks and their customers “are only separated by a porous membrane”, and their shared values make “the benefit of misconduct overweight the penalties that perpetrators may suffer.”

The study makes sober reading for those hoping regulatory action will quickly curb financial industry misconduct: the study’s findings imply that regulating such behaviour is “doomed to fail in its current state” because “institutional pressures can actually be counterproductive” in a sector like investment banking where banks and their top customers share many values.

“The study raises questions with regard to regulation when fields are subject to a strongly binding ideology, values or beliefs,” says Dr Roulet.

“Historically, investment banks were often chosen as an attractive employer because of this strong culture, and while the financial crisis has put this culture under intense public and media scrutiny, this hasn’t harmed the investment banks when it comes to IPO invitations and in fact the negative media coverage has been beneficial to them.

“As to what might change this behavior over time: some practices such as huge bonuses have slowly started to fade away, and some graduates are now shying away from investment banking in favour of technology companies and the start-up sector – and as a consequence, many investment banks have started rethinking their identity.”