Chinese Walls in German Banks

Analysts in a bank’s research department cover both firms that have no relationship with the bank as well as companies,in which the bank has a strategic interest. Officially, banks must establish Chinese Walls around their research departments to allow the analysts to work inde- pendently and to avoid the flow of insider information. We exam- ine analyst behavior under long-term bank-firm relationships using ownership data and analysts’ earnings per share forecasts on German companies,from 1994 to 2001. We find evidence that is consistent with analysts reconciling their employer’s interest with their own ca- reer concerns. They seem to use their information advantage strate- gically by releasing favorable and thereby more precise reports when the market underestimates earnings. In order not to jeopardize the bank-client relationship, they suppress negative information when the