Given the burgeoning literature on various aspects of security issuance,any coverage that is less than book-length must,unfortunately,be selective. Many important issues in corporate finance and macroeconomics are driven by the assumption that external finance is costly.Examples include theories of conglomerates (internal versus external capital markets),the effects of monetary policy (bank "capital crunches"and the "bank lending channel"of monetary policy transmission),financial development and growth. and financial accelerator models of business cycles.Because this literature is discussed by Stein (2002)in his chapter in this volume,this chapter will not focus on these important issues.This chapter also is related to other topics in this volume,including Barberis and Thaler's(2002) chapter on behavioral finance and Schwert's(2002)chapter on anomalies and market efficiency. This survey is somewhat U.S.-centric,largely reflecting the existing academic research literature.Although this is clearly a limitation,it is less of a limitation than it once was because capital markets are increasingly globally integrated,and U.S.institutional practices(in particular, book-building)and institutions are increasingly common throughout the world.As examples, Deutsche Bank's investment banking is headquartered in London;Credit Suisse First Boston, while nominally a Swiss firm,in 2000 was the lead manager on more IPOs in the U.S.than any other underwriter;and Goldman Sachs leads the league tables(market share tabulations)for M&A activity in Europe. 1.2 A briefhistory ofinvestment banking and securities regulation Until the 1970s,almost all investment banking firms were private partnerships,generally with a limited capital base.When underwriting large securities offerings,these partnerships almost always formed underwriting syndicates,in order to meet regulatory capital requirements,distribute the securities,and share risk.Many investment banking firms had "relationships"with corporations.In the 1970s,the investment banking industry began to change to a more "transactional"form,where corporations use different investment bankers for different services,on an as-needed basis.Investment banking firms have grown in size and scope,largely through mergers,and most of the larger firms have converted to publicly traded stock companies.A reason for the increase in size of investment banking firms is the increased importance of information technology,with large fixed costs and low marginal costs.With their new-found large capital bases and distribution channels,the historical rationale for forming syndicates to distribute securities has largely disappeared.Consistent with this,the number of investment banking firms participating in a given syndicate has shrunk noticeably over the last few decades.A syndicate is composed of one or more managing underwriters and from zero to over one hundred other syndicate members.The lead manager does most of the work and receives most of the fees(Chen and Ritter(2000)).All of the managers usually provide research coverage.Indeed,this is the major reason why syndicates still exist.Frequently,after a deal is completed,a"tombstone" advertisement listing the syndicate members is published in financial publications such as the Wall Street Journal. As a consequence of distributing the shares in an initial public offering,the lead underwriter knows where the shares are placed,which gives a natural advantage for making a market later on,since the underwriter knows whom to call if there is an order imbalance(Ellis, 44 Given the burgeoning literature on various aspects of security issuance, any coverage that is less than book-length must, unfortunately, be selective. Many important issues in corporate finance and macroeconomics are driven by the assumption that external finance is costly. Examples include theories of conglomerates (internal versus external capital markets), the effects of monetary policy (bank "capital crunches" and the "bank lending channel" of monetary policy transmission), financial development and growth, and financial accelerator models of business cycles. Because this literature is discussed by Stein (2002) in his chapter in this volume, this chapter will not focus on these important issues. This chapter also is related to other topics in this volume, including Barberis and Thaler’s (2002) chapter on behavioral finance and Schwert’s (2002) chapter on anomalies and market efficiency. This survey is somewhat U.S.-centric, largely reflecting the existing academic research literature. Although this is clearly a limitation, it is less of a limitation than it once was because capital markets are increasingly globally integrated, and U.S. institutional practices (in particular, book-building) and institutions are increasingly common throughout the world. As examples, Deutsche Bank’s investment banking is headquartered in London; Credit Suisse First Boston, while nominally a Swiss firm, in 2000 was the lead manager on more IPOs in the U.S. than any other underwriter; and Goldman Sachs leads the league tables (market share tabulations) for M&A activity in Europe. 1.2 A brief history of investment banking and securities regulation Until the 1970s, almost all investment banking firms were private partnerships, generally with a limited capital base. When underwriting large securities offerings, these partnerships almost always formed underwriting syndicates, in order to meet regulatory capital requirements, distribute the securities, and share risk. Many investment banking firms had “relationships” with corporations. In the 1970s, the investment banking industry began to change to a more “transactional” form, where corporations use different investment bankers for different services, on an as-needed basis. Investment banking firms have grown in size and scope, largely through mergers, and most of the larger firms have converted to publicly traded stock companies. A reason for the increase in size of investment banking firms is the increased importance of information technology, with large fixed costs and low marginal costs. With their new-found large capital bases and distribution channels, the historical rationale for forming syndicates to distribute securities has largely disappeared. Consistent with this, the number of investment banking firms participating in a given syndicate has shrunk noticeably over the last few decades. A syndicate is composed of one or more managing underwriters and from zero to over one hundred other syndicate members. The lead manager does most of the work and receives most of the fees (Chen and Ritter (2000)). All of the managers usually provide research coverage. Indeed, this is the major reason why syndicates still exist. Frequently, after a deal is completed, a “tombstone” advertisement listing the syndicate members is published in financial publications such as the Wall Street Journal. As a consequence of distributing the shares in an initial public offering, the lead underwriter knows where the shares are placed, which gives a natural advantage for making a market later on, since the underwriter knows whom to call if there is an order imbalance (Ellis