Chapter

An Institutional Theory of Investment Banking

Alan D. Morrison and William J. Wilhelm Jr.

in Investment Banking

Published in print February 2007 | ISBN: 9780199296576
Published online May 2007 | e-ISBN: 9780191712036 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199296576.003.0003
An Institutional Theory of Investment Banking

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This chapter applies the property rights theory of Chapter 2 to the investment bank. A critical activity in capitalist economies is the allocation of new resources to new ventures. But this activity rests upon dispersed information over which it is impossible to enforce formal property rights. Hence, it is very hard to provide the right incentives to ensure that this information is created, and that it is communicated to investors. It is argued that the primary role of the investment bank is to create and to enforce extra-legal property rights over this price-relevant information. Investment banks manage an ‘information marketplace’, a close network of institutions that agree to relational contracts over information production and exchange. The members of an information marketplace are described and their management is explained. The investment bank relies upon its reputation to enforce these contracts. Since by their nature relational contracts cannot be formally documented, the chapter notes the central importance to investment banks of tacit knowledge.

Keywords: investment bank; information marketplace; property rights; tacit knowledge; reputation

Chapter.  12930 words.  Illustrated.

Subjects: Financial Markets

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