Alan D. Morrison and William J. Wilhelm, Jr.
- Published in print:
- 2007
- Published Online:
- May 2007
- ISBN:
- 9780199296576
- eISBN:
- 9780191712036
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199296576.001.0001
- Subject:
- Economics and Finance, Financial Economics
This book 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 and recent changes to the investment ...
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This book 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 and recent changes to the investment banking industry. The book points to the importance of well-defined property rights and properly-functioning property rights institutions in supporting the devolved decision making that drives capitalist economies. A critical decision in capitalist economies is the investment decision that allocates resources to new ventures. But this decision relies upon price-relevant information over which it is impossible to establish property rights; as a result, it is very hard to coordinate the exchange of this information. The book argues 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 theory is substantiated with reference to the industry's evolution during the last three centuries. It shows how investment banking networks were formed, and identifies the informal contracts they supported. This historical development points to tensions between banks and the regulatory impulses of the State, thus providing some explanation for periodic large-scale State intervention in the operation of capital markets. The book's theory also provides a technological explanation for the massive restructuring of the capital markets in recent decades, which can be used to think about the likely future direction of the investment banking industry.Less
This book 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 and recent changes to the investment banking industry. The book points to the importance of well-defined property rights and properly-functioning property rights institutions in supporting the devolved decision making that drives capitalist economies. A critical decision in capitalist economies is the investment decision that allocates resources to new ventures. But this decision relies upon price-relevant information over which it is impossible to establish property rights; as a result, it is very hard to coordinate the exchange of this information. The book argues 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 theory is substantiated with reference to the industry's evolution during the last three centuries. It shows how investment banking networks were formed, and identifies the informal contracts they supported. This historical development points to tensions between banks and the regulatory impulses of the State, thus providing some explanation for periodic large-scale State intervention in the operation of capital markets. The book's theory also provides a technological explanation for the massive restructuring of the capital markets in recent decades, which can be used to think about the likely future direction of the investment banking industry.
