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CAIRO BOOKS's Description
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.