Conflict of Interest in the Issuance of Public Securities: Evidence from Venture Capital

In this paper we investigate potential conflicts of interest in the issuance of public securities in a setting analogous to a universal bank, i.e., the underwriting of initial public offerings by investment banks that hold equity in a firm through a venture capital subsidiary. We contrast two hypotheses. Under anticipate the conflict. The suggests that investment banks are able to utilize superior information when they underwrite securities. The evidence supports the rational discounting hypothesis. Initial public offerings that are underwritten by affiliated investment banks perform as well or better than issues of firms in which none of the investment banks held a prior equity position. Investors do, however, require a greater discount at the offering to compensate for potential adverse selection. We also provide evidence that investment bank-affiliated venture firms address the potential conflict by investing in and subsequently underwriting less information-sensitive issues. Our evidence provides no support for the prohibitions on universal banking instituted by the Glass-Steagall Act of 1933.

Investment banks

Investment banking is a generic term for transactional activities involving financial intermediation conducted through open markets. It was long associated with a legal demarcation in the US and Japan that separated banks that made loans and took deposits from those that traded in securities, but now denotes risk-based activities in banks of any kind. This paper explains investment banking practices in terms of reputational capital, and contrasts the transactional skills and innovation found in successful investment banks with concerns as to the societal value of their activities that have developed since the 2007-09 global crisis.postprin

Sizing the European Shadow Banking System: A New Methodology

One of the critical unanswered questions relating to the shadow-banking system has been to quantify its scale in an industry where entities, by design, are opaque and often outside of regulated and publically shared frameworks. However almost all shadow banking entities, including hedge funds, private equity funds and special purpose vehicles ("SPVs"), interact with the financial markets via regulated investment banks. For example, many SPVs are in fact originated as part of investment banking business and hedge funds typically transact in financial markets exclusively via the "prime brokerage" division of investment banks. This interface with the regulated banking environment combines with the typical practise by investment banks of equalizing compensation (Including bonus) ratios to revenues globally which then allows identification of the implied difference in revenues and hence assets that represents the shadow banking system. The paper will present for critique the results of this methodology to estimate the UK shadow banking system including European business managed from the UK. The estimate will imply a larger scale of shadow banking than previous estimates at £548 billion which, when combined with hedge fund assets of £360 billion (FSA, 2011) gives total shadow banking assets of over £900 billion. It is proposed that the large gap between the estimates of this paper and other estimates reflects the huge, and previously unknown, scale of offshore activities of UK investment banks

Investment Bank Expertise in Cross-Border Mergers and Acquisitions

We study the influence of country expertise of investment banks in facilitating cross‐border merger deals by analyzing a large international sample of merger and acquisition (M&A) deals. We provide evidence that the geographical proximity, cultural affinity, and local experience of investment banks advising bidding firms on cross‐border M&A deals significantly increase the probability of completion of the deal, significantly decrease the time required to complete the deal, and significantly increase the operating performance of the acquiring firm after the deal. Our results are robust to firm, deal, country‐specific factors, and endogeneity concerns

Covered bonds: a new way to fund residential mortgages

Like the now government-owned Fannie Mae and Freddie Mac, large investment banks helped create funds to finance new mortgages by issuing securities backed by pools of existing mortgages. But private firms have abandoned these instruments, and with them a large source of mortgage funds has disappeared. Four large investment banks plan to create a new U.S. market for an old instrument, hoping to bring liquidity back to the mortgage market.Mortgage loans ; Mortgage-backed securities

Banker Fees and Acquisition Premia for Targets in Cash Tender Offers: Challenges to the Popular Wisdom on Banker Conflicts

We analyze data on fees paid to investment bankers and acquisition premia paid for targets in cash tender offers. Our results are broadly consistent with the predictions of a benign view of the role of investment banks in advising acquisition targets. Fees to investment banks are correlated with attributes of transactions and target firms in ways that make sense if banks are being paid for processing information. The more contingent (and, therefore, risky) the fees, the higher they tend to be, all else held constant. Variation in acquisition premia also can be explained by fundamental deal attributes. Contrary to the jaundiced view of fairness opinions, greater fixity of fees is not associated with higher acquisition premia, and there is no evidence that investment banks are suborned by acquirors with whom they have had a prior banking relationship.

The United States dominates global investment banking: does it matter for Europe? Bruegel Policy Contribution 2016/06, March 2016

In the aftermath of the global financial crisis, the market share of US investment banks is increasing, while that of their European counterparts is declining. We present evidence that US investment banks are on the verge of taking over pole position in European investment banking. Meanwhile, since 2015, Chinese investment banks have overtaken American and European investment banks in the Asia-Pacific market. Credit rating agencies and investment banks are the gatekeepers of the capital markets. The European supervisory institutions can effectively supervise the European operations of these US-managed players. On the political side, we suggest that the European Commission should continue to view its, albeit declining, banking industry as a strategic sector. The Commission, the European Central Bank and the Bank of England should jointly develop a strategic agenda for the EU-US Regulatory Dialogue. Finally, corporates rely on investment banks to issue new securities. We recommend that the big European corporates should cherish the (few) remaining European investment banks, by giving them at least one place in otherwise US- dominated banking syndicates. That could help to avoid complete dependence on US investment banks

AGILE ADOPTION IN INVESTMENT BANKS

Many companies and organizations, regardless of industries, countries, size, and cultures, are in the process of transiting from traditional project management methods to Agile. When it comes to financial industry, today’s investment banks, face more unstable market conditions, faster changes of worldwide politics, economies and technologies, stricter regulations, and greater pressure to meet customers’ requirements and sustain revenue growth. Investment banks are usually full-service global financial institutions, which provide advisory and financing banking services, as well as sales, market making, and research on financial products. Therefore, investment banks are in great need to transform from traditional PM concepts to Agile. However, a big issue in investment banks is the lack of applying Agile. To address this issue, this thesis is focusing on “what is the current status of adopting Agile in investment banks”, “why investment banks have not fully adopted Agile”, “why investment banks should adopt Agile methodology” and “how to apply agile in investment banks”. The research of this thesis will be conducted using two main approaches. To answer the first three questions mentioned above, two main approaches, researching the existing articles and questionnaire survey among the investment banks employees, will be used. Based on the findings and conclusions of the research and the survey, recommendations will be provided to address how investment banks can successfully apply Agile within the organization. The results of the research will be able to provide a guidance for investment banks on how to smoothly transit from traditional project management methods to Agile, and help to bring more attention to this topic and stimulate more related research in the future

Banking Relationships and Access to Equity Capital Markets: Evidence from Japan’s Main Bank System

We study the role of banking relationships in IPO underwriting using a sample of 484 Japanese IPOs. Among other issues, we consider whether bank relationships lead to increased access to public equity markets, especially for smaller, lesser-known firms. When a firm in Japan goes public, it can engage an investment bank that is related through a common main bank, or can select an alternative investment bank. The main bank relationship can be an efficient way for the investment bank to acquire information generated by the main bank, but may give rise to conflicts of interest. We use data from two different investment banking regimes in Japan (a hybrid auction-method regime and a book-building regime) and find that main bank relationships give small issuers increased access to equity capital markets, but that issuers of large IPOs switch to non-related investment banks that are capable of managing large offerings. While we find evidence that investment banks seek to exploit bargaining power with related issuers, we also find that issuers respond to expected high issue cost by switching to non-related investment banks. The net result is that total issue costs through related and non-related investment banks are similar. With respect to aftermarket performance and use of offer proceeds, we find no evidence of conflict of interest or self-dealing for either the main bank or the investment bank.Main Bank; Banking Relationships; Capital Market Access; IPOs; Underwriting; Japanese Economy

Bank runs: A risk mismanagement perspetive: A note

This paper demonstrates that the fractional reserve system is a source of instability in commercial and investment banks. The purpose of investment banks is to enhance completeness of financial markets and thereby contribute to an efficient allocation of risk. When funds are raised through commercial banks to transact in securities of investment banks, this can cause instability to commercial and investment banks as is experienced currently in world financial markets