Investment Bank Governance and Client Relationships

The relational contract at the heart of an investment banking relationship is valuable because it engenders and requires mutual trust in a setting where conflicts of interest are significant and are not easily resolved through formal contract. But a bank’s ability to commit to a relational contract depends on internal governance mechanisms that align the interests of individual bankers with those of the bank. We argue that increasing complexity in investment banks weakens internal governance and estimate a causal model that indicates that the likelihood of a relationship being broken is increasing in bank complexity.