Chinese wall

From Academic Kids

This article discusses various theoretical concepts that have been named a Chinese wall. For the ancient fortification in China, see Great Wall of China.

In business, a Chinese wall is a means used to make sure that different parts of the firm are kept separate so that information does not circulate freely and to prevent conflicts of interest. 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 offering.



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, 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 passed laws improving the Chinese Wall concept (e.g. Sarbanes-Oxley Act) 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 journalism to describe the separation between the editorial and advertising arms of a media firm.

The Chinese wall is regarded as breached for advertorial projects.

Computer science

In computer science, Chinese wall refers to a reverse engineering method involving two separate groups. One group reverse-engineers the original code and writes thorough documentation, while the other group writes new code based only on the new documentation. The first group never writes new code, and the second group never looks at the original code. This method insulates the new code from the old code, so that the new code is not considered a derived work of the old code. See also clean room design.

See also


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