No One Gets Fired for Hiring Goldman Sachs

I came across a research article in Knowledge@Wharton titled "Show Me the Money: Aura of Top M&A Banks Often Obscures Low Returns for Clients" about how the league tables ranking investment banks don't necessarily correspond to post-M&A performance of the banks' clients. In fact, the study finds that there's actually a negative correlation between the league tables and post-M&A performance. That's obviously counter-intuitive. One possible reason is as follows:

Banks are simply responding sensibly to industry practices. "Since clients ignore the very measures that do predict future performance [i.e. past performance] and instead focus on market share, it is entirely logical for banks to maximize their league table position -- in particular, by accepting even value-destructive mandates," he and Bao write. "Not only will the mandate boost fee income today, but it will also increase market share and the ability to generate income in the future."

Once market share becomes entrenched as the standard for evaluation and thus a signal of reputation, it can undermine efforts by corporate managers to use other measures. "Remember the old saying, 'No one gets fired for buying IBM,'" Edmans says. "Goldman Sachs is often number one in the league tables and it's the same with them. No one gets fired for choosing Goldman Sachs as their investment banker."

This is not to say that the quality of these banks is not high. It's simply to say that the incentives in the industry are counter-intuitive -- banks take on business that may actually destroy value rather than create it in an attempt to maintain their league table ranking. One question that comes to mind, then, is if (and how) you change the incentives?

Comments

Biofuels May Hinder Anitglobal-Warming Efforts

Read an interesting article a couple weeks back in the WSJ on how biofuels may actually increase carbon emissions in the medium to long-term. Apprently the shifts in land-use necessary to support the production of bio-materials like soybeans, corn, or palm could in fact release more carbon emissions. The time it takes to get carbon-neutral on some of these projects is pretty crazy - 319 years for soybean biodiesel from Brazil (assuming you're clearing rainforest), 93 years for corn ethanol from the U.S. (assuming you're clearing grasslands), 86 years for palm biodiesel from Indonesia (assuming you're clearing rainforest). I suppose biofuels really aren't meant to reduce carbon emissions, but just crazy that they potentially exacerbate the problem so much.

Nine Prescriptions for Building the Duke Entrepreneurial Community

I think Duke can have one of the strongest entrepreneurial communities in the world. Are we there yet? Well, not yet. But there's a tremendous amount of momentum that I saw build in just the past two years while I was getting my MBA at Duke. While leading Duke's 10th annual business plan competition, the Duke Start-Up Challenge (DSC) , last year, I witnessed a near doubling of participation on campus in just a single year. The interest on the ground was clearly there and building rapidly. But now that I'm an alum, I'm looking back and wondering ... how do we rev-up the Duke entrepreneurial community even more? I read a great article by Daniel Isenberg, a professor of management at Babson, called " How to Start an Entrepreneurial Revolution " in the June edition of the Harvard Business Review. Isenberg outlines nine prescriptions for governments that want to create entrepreneurship ecosystems in their countries. Although he was focused on governments an

Bloomberg for President?

We can only hope. I read an article in the WSJ about how business people across the country, from entrepreneurs to bankers, are all hoping for Bloomberg to run. The economy thus far seems to have taken an unusual backseat in this years election but seems to be emerging as an important issue. An interesting excerpt: As the economy has emerged as a dominant issue in the 2008 campaign, candidates have struck populist notes, from Republican Mike Huckabee's boast that he is not a "wholly owned subsidiary of Wall Street" to Democrat Barack Obama's visit to Wall Street to chastise finance executives for failing to protect the middle class. I can see the approach these guys are taking and I'm sure they have really smart campaign strategists. But I really wonder if this type of message of polarizing the "working man" vs. "big business" really resonates with voters anymore? Is the middle-class really that disgruntled with big business and income dispa

Power Pal

Search This Blog