Investment Bank Reputation, Information Production, and Financial Intermediation




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    • Graduate School of Business, Columbia University. We thank the Paolo Baffi Center for Monetary and Financial Economics for providing partial financial support for this research. For helpful comments or discussions, we thank Franklin Allen, Ivan Brick, Larry Fisher, Michael Fishman, Gur Huberman, Kose John, George Kanatas, Yong Kim, Dennis Logue, Robyn MacLaughlin, and Matthew Spiegel. We also thank participants in finance workshops at Bocconi University, INSEAD, Rutgers University, the Columbia-NYU Joint Finance Seminar, the August 1991 European Finance Association meetings, and the 1992 American Finance Association meetings for helpful comments. Special thanks to Stephen Buser and René Stulz (the editors), and to two anonymous referees for several helpful suggestions. We alone are responsible for any errors or omissions.


We model reputation acquisition by investment banks in the equity market. Entrepreneurs sell shares in an asymmetrically informed equity market, either directly, or using an investment bank. Investment banks, who interact repeatedly with the equity market, evaluate entrepreneurs' projects and report to investors, in return for a fee. Setting strict evaluation standards (unobservable to investors) is costly for investment banks, inducing moral hazard. Investment banks' credibility therefore depends on their equity-marketing history. Investment banks' evaluation standards, their reputations, underwriter compensation, the market value of equity sold, and entrepreneurs' choice between underwritten and nonunderwritten equity issues emerge endogenously.