Investment Banking Institutions, Politics, and Law

by Morrison, Alan D.; Wilhelm, William J.

• ISBN13: 9780199296576
• ISBN10: 019929657X
• Format: Hardcover
• Copyright: 2007-03-15
• Publisher: Oxford University Press

Summary

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. Althoughinvestment 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-legalinstitutions 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 relationalcontracting 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 marketsin recent decades, which the authors argue can be used to think about the likely future direction of the investment banking industry.

Author Biography

Alan Morrison's research is largely concerned with commercial and investment banking. His work has been published in the American Economic Review, Journal of Financial Economics, Journal of Business, Journal of Business Finance and Accounting, the Scottish Journal of Political Economy, the Geneva Papers and Economics Letters. He worked for six years in management consultancy and investment banking before taking his doctorate in Oxford. Since 2000, he has been a University Lecturer at the Said Business School and a fellow of Merton College, University of Oxford.
Professor Wilhelm's research focuses on investment banks and securities offerings. He has written extensively on initial public offerings and his work has been published in the American Economic Review, Journal of Finance, Journal of Financial Economics, The Review of Financial Studies, Journal of Financial Intermediation, Journal of Money, Credit, and Banking, Oxford Review of Economic Policy, and Journal of Applied Corporate Finance. Professor Wilhelm began his academic career in 1988 at the Wallace E. Carroll School of Management at Boston College. Before joining the McIntire School of Commerce at the University of Virginia in 2002, Professor Wilhelm held the American Standard Companies Chair in Management Studies at the Said Business School and was a Professorial Fellow of St Edmund Hall, University of Oxford, where he began serving as a visiting fellow in 1998.

Table of Contents

Prologue	p. vii
List of Figures	p. xi
List of Tables	p. xiii
Introduction	p. 1
Market trends	p. 7
Industry structure	p. 15
Investment bank activities	p. 21
The growing dichotomy between specialists and generalists	p. 30
Conclusion	p. 35
Institutional Theory	p. 37
Property rights, institutions, and the state	p. 38
Non-state institutions	p. 45
State decision-making, the law, and extra-legal contracting	p. 59
Conclusion	p. 62
An Institutional Theory of Investment Banking	p. 65
Information, innovation, and property rights	p. 67
Information marketplaces and investment banking	p. 71
Internal organization	p. 88
Industrial organization	p. 92
Conclusion	p. 95
Investment Banking Origins	p. 97
Information exchange	p. 98
Institutions and the law	p. 101
Mercantile networks	p. 107
Early capital markets	p. 117
Conclusion	p. 120
The Rise of the Investment Bank	p. 121
Merchant banking	p. 123
The legal and political environment	p. 126
The evolution of investment banking	p. 136
Conclusion	p. 153
Investment Banking in the Age of Laissez-Faire	p. 155
Legal and political environment	p. 156
Technological advances	p. 157
The Civil War and retail investment banking	p. 160
Investment bankers after 1873	p. 162
Investment banking after 1873	p. 170
Conclusion	p. 184
Leviathan and the Investment Banks	p. 187
Changes to the legal and political environment	p. 188
Legislation, regulation, and investment banking	p. 196
Industry evolution	p. 215
United States versus Morgan Stanley	p. 220
Conclusion	p. 223
The Modern Industrial Revolution	p. 225
Early computer advances	p. 227
Early changes to market structure	p. 231
Real-time computation	p. 238
The revolution in financial economics	p. 242
New human capital businesses	p. 249
Conclusion	p. 263
Inside the Investment Bank	p. 265
Investment bank partnerships	p. 267
The joint-stock investment bank	p. 280
Conclusion	p. 291
What Next?	p. 293
Large, complex banking organizations	p. 294
Small, focused investment banks	p. 300
Conclusion	p. 309
Bibliography	p. 311
Index	p. 333
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