Investment Bankers

Just as economies of scale and specialization create profit opportunities for financial intermediaries, so too do these economies create niches for firms that perform specialized services for businesses. Firms raise much of their capital by selling securities such as stocks and bonds to the public. Because these firms do not do so frequently, however, investment banking firms that specialize in such activities can offer their services at a cost below that of maintaining an in-house security issuance division.

Investment bankers such as Goldman, Sachs, or Merrill Lynch, or Salomon Smith Barney advise the issuing corporation on the prices it can charge for the securities issued, appropriate interest rates, and so forth. Ultimately, the investment banking firm handles the marketing of the security issue to the public.

Investment bankers can provide more than just expertise to security issuers. Because investment bankers are constantly in the market, assisting one firm or another in issuing securities, the public knows that it is in the banker's own interest to protect and maintain its reputation for honesty. The investment banker will suffer along with investors if the securities it underwrites are marketed to the public with overly optimistic or exaggerated claims; the public will not be so trusting the next time that investment banker participates in a security sale. The investment banker's effectiveness and ability to command future business thus depend on the reputation it has established over time. Obviously, the economic incentives to maintain a trustworthy reputation are not nearly as strong for firms that plan to go to the securities markets only once or very infrequently. Therefore, investment bankers can provide a certification role—a investment bankers

Firms specializing in the sale of new securities to the public, typically by underwriting the

14 Part ONE Elements of Investments

"seal of approval"—to security issuers. Their investment in reputation is another type of scale economy that arises from frequent participation in the capital markets.

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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