INVESTMENT BANKING: INSTITUTIONS, POLITICS, AND THE LAW

Investment Banking: Institutions, Politics, and Law provides an economic rationale for the dominant role of investment banks in the capital markets, and uses it to explain both the historical evolution of the investment banking industry and also recent changes to its organization. Although investment decisions rely upon price-relevant information, it is impossible to establish property rights over it and hence it is very hard to coordinate its exchange. The authors argue that investment banks help to resolve this problem by managing information marketplaces, within which extra-legal institutions support the production and dissemination of information that is important to investors. Reputations and relationships are more important in fulfilling this role than financial capital. The authors substantiate their theory with reference to the industry's evolution during the last three centuries. They show how investment banking networks were formed, and identify the informal contracts that they supported. This historical development points to tensions between the relational contracting of investment banks and the regulatory impulses of the State, thus providing some explanation for the periodic large-scale State intervention in the operation of capital markets. Their theory also provides a technological explanation for the massive restructuring of the capital markets in recent decades, which the authors argue can be used to think about the likely future direction of the investment banking industry. Contents......Page 6 Prologue......Page 8 List of Figures......Page 12 List of Tables......Page 14 1. Introduction......Page 16 Market trends......Page 22 Industry structure......Page 30 Investment bank activities......Page 36 The growing dichotomy between specialists and generalists......Page 45 Conclusion......Page 50 2. Institutional Theory......Page 52 Property rights, institutions, and the state......Page 53 Non-state institutions......Page 60 State decision-making, the law, and extra-legal contracting......Page 74 Conclusion......Page 77 3. An Institutional Theory of Investment Banking......Page 80 Information, innovation, and property rights......Page 82 Information marketplaces and investment banking......Page 86 Internal organization......Page 103 Industrial organization......Page 107 Conclusion......Page 110 4. Investment Banking Origins......Page 112 Information exchange......Page 113 Institutions and the law......Page 116 Mercantile networks......Page 122 Early capital markets......Page 132 Conclusion......Page 135 5. The Rise of the Investment Bank......Page 136 Merchant banking......Page 138 The legal and political environment......Page 141 The evolution of investment banking......Page 151 Conclusion......Page 168 6. Investment Banking in the Age of Laissez-Faire......Page 170 Legal and political environment......Page 171 Technological advances......Page 172 The Civil War and retail investment banking......Page 175 Investment bankers after 1873......Page 177 Investment banking after 1873......Page 185 Conclusion......Page 199 7. Leviathan and the Investment Banks......Page 202 Changes to the legal and political environment......Page 203 Legislation, regulation, and investment banking......Page 211 Industry evolution......Page 230 United States versus Morgan Stanley......Page 235 Conclusion......Page 238 8. The Modern Industrial Revolution......Page 240 Early computer advances......Page 242 Early changes to market structure......Page 246 Real-time computation......Page 253 The revolution in financial economics......Page 257 New human capital businesses......Page 264 Conclusion......Page 278 9. Inside the Investment Bank......Page 280 Investment bank partnerships......Page 282 The joint-stock investment bank......Page 295 Conclusion......Page 306 10. What Next?......Page 308 Large, complex banking organizations......Page 309 Small, focused investment banks......Page 315 Conclusion......Page 324 Bibliography......Page 326 B......Page 348 D......Page 349 F......Page 350 I......Page 351 M......Page 352 P......Page 353 S......Page 354 U......Page 355 Z......Page 356 "Investment Banking: Institutions, Politics, and Law provides an economic rationale for the dominant role of investment banks in the capital markets, and uses it to explain both the historical evolution of the investment banking industry and also recent changes to its organization. Although investment decisions rely upon price-relevant information, it is impossible to establish property rights over it and hence it is very hard to coordinate its exchange. The authors argue that investment banks help to resolve this problem by managing "information marketplaces," within which extra-legal institutions support the production and dissemination of information that is important to investors. Reputations and relationships are more important in fulfilling this role than financial capital. The authors substantiate their theory with reference to the industry's evolution during the last three centuries. They show how investment banking networks were formed, and identify the informal contracts that they supported. This historical development points to tensions between the relational contracting of investment banks and the regulatory impulses of the State, thus providing some explanation for the periodic large-scale State intervention in the operation of capital markets. Their theory also provides a technological explanation for the massive restructuring of the capital markets in recent decades, which the authors argue can be used to think about the likely future direction of the investment banking industry."--Jacket This volume provides a comprehensive introduction to the theory, history and practice of investment banking and will be a useful supplementary text on MBA courses and graduate level courses in corporate finance, financial management, and advanced finance