| • Science | • People | • Locations | • Timeline |
The term is especially common in areas such as brokerage, law firms and management consulting.
The term was coined in the United States following the stock market crash of 1929, in reference to the Great Wall of China. The U.S. government saw the Chinese wall as a means to provide separation (or an information barrier) between investment bankers and brokerage firms. This was intended to limit the conflict of interest between objective analysis of companies and the desire to have a successful initial public offerings.
The concept of a Chinese Wall is that of establishing a zone of non-communication between distinct sections of a business, in order to prevent possible (and probable) conflict of interest.
A Chinese Wall is most commonly employed in an investment bank, where such banks offer corporate finance services to companies (managing the fund-raising, for example), and at the same time also provide financial research information to a more general audience.
Because it is possible to manipulate the financial research reports to encourage the general public to purchase shares in a company (for example), the conflict of interest arises when such a company is also the customer of this particular investment bank.
In fact, despite Chinese walls (named after the Great Wall of China), these situations of conflict of interest allegedly arose during the heydays of the " dot com" gold rush, where research analysts essentially marketed companies which they, or related parties, own shares of. By putting out positive research advice, or even simply by choosing to talk about their client amongst the thousands of possible companies they might have discussed, the share price of these companies could be boosted without regard for actual financial worthiness. In a way, this was one of the many factors contributing to the dotcom " bubble" which eventually burst around the first half of 2000, resulting in a lengthy sluggishness in world markets for years to come.
The U.S. government has since recommended modifications and improvements made to the Chinese Wall concept, to hopefully prevent such grievous dereliction of duty by research analysts and their banking employers.
There are some who critique the Chinese wall, saying that it prevents some small companies from being properly valued, since without the ability to get exposure via a tie-in with the investment bank, most investors would simply not know about them.
The Chinese wall is also used in law firms in situations where one part of the firm, which is representing a party on a deal or litigation, is separate from another part of the firm that might otherwise have an adverse effect on the party's interests.
The term is also used in journalismJournalism is a discipline of collecting, verifying, reporting and analyzing information gathered regarding current events, including trends, issues and people. It is sometimes defined more broadly as the pursuit of the truth. Those who practice journalis to describe the separation between the editorial and advertisingAdvertising is the paid promotion of goods, services, companies and ideas, by an identified sponsor. Marketers see advertising as part of an overall promotional strategy. Other components of the promotional mix include publicity, public relations, persona arms of a media firm.
The Chinese wall is regarded as breached for advertorialAn advertorial is an advertisement written in the form of editorial copy in a printed publication. They are usually designed to look like news stories. Most publications will not accept advertisements that look exactly like stories from the newspaper or m projects.