Controlling Conflicts of Interest: A Tale of Two Industries


Large corporate conglomerates are being formed in many industries. Although a conglomerate may be able to use its multiple businesses to offer better products or services or lower prices, conglomeration can also create conflicts of interest within a corporation, harming consumers. Other researchers and observers have long been aware of these conflicts of interest, however, this Article’s empirical analyses identify what specific characteristics of a conglomerate cause conflicts of interest to actually result in harm to consumers. In doing so, the Article also guides policymakers regarding how to regulate conflicts of interest.

This Article examines two industries – financial services and the media – in which conglomeration has created similar conflicts of interest. Much attention is being focused on the conflicts of interest of many research analysts who recommend stocks for investors. These research analysts work for financial conglomerates that also have investment banking departments. As a result, these analysts have faced great pressure to write positive research reports about companies from which their employers seek investment banking business. Unfortunately, this pressure has resulted in analysts giving biased recommendations in favor of these companies, harming millions of investors who rely on these recommendations. In response to this bias, the Securities and Exchange Commission, other regulatory organizations, and courts have recently imposed billions of dollars in fines and civil settlements and a number of rules and regulations on research analysts and their employers. These reforms are targeted at reducing and publicly disclosing analysts’ conflict of interests.

The situation of another group of professionals – movie critics who work for media conglomerates – is parallel to that of these research analysts. Many prominent movie critics, including Roger Ebert, now regularly review movies that are distributed by studios owned by the critics’ parent companies. These critics can generate additional profits for these studios by giving positive reviews to their movies. However, despite this conflict of interest, this Article’s empirical analyses find no systematic bias in these critics’ movie reviews.

The difference in the behavior of research analysts and movie critics raises an important question: Why do some conglomerates’ conflicts of interest result in biased opinions, harming consumers, while other conflicts of interest do not do so? The Article finds that differences in the structure of the conglomerates in which research analysts and movie critics work and differences in the direct financial incentives they face are responsible for the different outcomes. This conclusion provides insight into what causes conflicts of interest in conglomerates to result in harm to consumers and how policymakers should regulate conflicts of interest.


Law and Society

Date of this Version

August 2005