Regulation of ''Guru'' Analysts' Conflicts of Interest

Conflicts of interest are the inherent price to pay to benefit from information synergies offered by multiple financial service providers. We focus on conflicts faced by a investment bank's "guru" sell-side analyst, which is torn between the pro-investor research department favoring fair valuation, and the "pro-corporate firms" underwriting department favoring overvaluation. Thanks to a delegated common agency game under moral hazard, we endogenize the influence of environment variables on conflicts outcome as regards market valuation. We demonstrate first that the risk of overvaluation depends crucially on the extent of the relative pricing preferences of opposite financial interests at stake. Thus, the more the potential profit from underwriting activities exceeds potential brokerage commissions, the more the bank favors issuers over investors, and the more likely market overvaluation is. Consequently, to protect naive uninformed investors, we introduce in a second time a regulator in the framework of a simultaneous intrinsic relationship, which su¤ers from overvaluation on the one hand, and is allowed to take costly judicial proceedings to penalize banks on the other hand. We then show that coercive regulation greatly mitigates damaging conflicts outcomes, even if it induces free-riding behaviors among fair-valuation partisans.