Investment Banking Culture & Fraud

Paper Summary:

This study investigates the question: Do investment banks, because of their internal culture, lend themselves to the acts of fraudulent behaviors by some employees? This question is investigated through the testing of a related hypothesis. The HoHA research approach is followed in the formulation and testing of the hypothesis. The hypotheses are as follows:
Ho: There is no relationship between investment banking culture and acts of fraudulent behavior on the part of some employees of investment banks.
HA: The investment banking culture both facilitates and encourages some employees of investment banks to engage in acts of fraudulent behavior.
The hypothesis is tested and the research question is investigated through a review of high profile event in the investment banking industry over the past few decades. Investment banking is reviewed briefly in the following section, and this review is followed by a review of investment banking culture as reflected in selected high profile cases, including those of Michael Milken, Ivan Boesky, Nicholas Leeson, and Toshihide Iguchi.

From the Paper:

"The major operational functions of investment banking firms are underwriting, dealing, brokerage, and the provision of financial advice. The underwriting function involves origination, risk bearing, and distribution. Origination is concerned with defining the essential characteristics of an investment offering (debt or equity, pricing, timing, method of distribution, and so forth). Risk bearing on the part of an investment bank involves the purchase by a bank at a fixed price of a new securities issue, for eventual sale to the investing public (Pugel & White, 1995). In this context, the investment bank is at risk until the new issue is sold. Distribution is the act of selling the issue to the investing public. The provision of financial advice accompanies the underwriting function, although financial advice is also provided in other instances, such as, in conjunction with merger and acquisition decisions."

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