Investment banking firms are intermediaries that advise firms,distribute securities,and take principal positions.In the course of these activities,information is produced.Most investment banking firms are vertically integrated organizations that incorporate merger and acquisition(M&A)advisory services,capital raising services,securities trading and brokerage,and research coverage.Although there are distinctions,this chapter will use the terms investment bank,securities firm,and underwriter interchangeably.In Europe,universal banks have been permitted to perform both commercial and investment banking functions.In the U.S.,the Glass- Steagall Act separated commercial and investment banking functions from the 1930s to the 1990s. Commercial banks were permitted to take deposits from individuals that are guaranteed by the government (up to $100,000 per account-holder,as of 2001).In return for the government deposit guarantee,commercial banks were prohibited from certain activities,including taking equity positions in firms and underwriting corporate securities.The prohibition on underwriting securities was gradually relaxed,first for debt securities and then for equity securities.In 1999,the Glass-Steagall Act was finally repealed,although deposit insurance remains. The key difference between commercial banks and investment banks in the corporate financing function is that commercial banks primarily act as long-term principals,making direct loans to borrowers,whereas investment banks primarily act as short-term principals.Since investment banks are selling to investors the securities that firms issue,the marketing of financial securities is important.This is a topic that has no reason for coverage in a Modigliani-Miller framework,where markets are perfect and there is no role for marketing.An important tool in the marketing of financial securities,especially equities,is research coverage(forecasts and recommendations)by security analysts.Since the investment banking firm providing research reports also underwrites offerings,this is referred to "sell-side"coverage.There is a perception that analyst coverage has become more important over time,partly because for many industries (i.e.,biotechnology and technology companies),historical accounting information is of limited use in discerning whether new products and services will create economic value added.At the end of 2000,the Securities and Exchange Commission's Regulation FD(fair disclosure)went into effect.This regulation may affect the role of analysts,for it requires that information that a corporation provides to analysts must be publicly disclosed to others as well This chapter updates and extends previous surveys of the investment banking and securities issuance literature,notably Smith(1986)on the capital acquisition process,Eckbo and Masulis(1995)on seasoned equity offerings(SEOs),Ibbotson and Ritter(1995)on initial public offerings(IPOs),and Jenkinson and Ljungqvist(2001)on IPOs.For those interested in a comprehensive analysis of the literature on IPOs,the Jenkinson and Ljungqvist book goes into extensive detail.Ritter and Welch(2002)focus on the recent IPO literature,especially papers dealing with share allocations.Both the Smith survey and the Eckbo and Masulis survey are grounded in an equilibrium market efficiency framework,and neither discusses long-run performance issues.The Eckbo and Masulis survey has an extensive discussion of rights issues (equity issues where existing shareholders are given the right to purchase new shares at a fixed exercise price).Rights issues will not be covered here,partly because rights issues are not common in the U.S.and their use in other countries has been rapidly declining,and partly due to the excellent existing analysis.Many other topics in security issuance are mentioned in passing or not discussed at all.For example,will technology change the securities issuance process? 33 Investment banking firms are intermediaries that advise firms, distribute securities, and take principal positions. In the course of these activities, information is produced. Most investment banking firms are vertically integrated organizations that incorporate merger and acquisition (M&A) advisory services, capital raising services, securities trading and brokerage, and research coverage. Although there are distinctions, this chapter will use the terms investment bank, securities firm, and underwriter interchangeably. In Europe, universal banks have been permitted to perform both commercial and investment banking functions. In the U.S., the Glass￾Steagall Act separated commercial and investment banking functions from the 1930s to the 1990s. Commercial banks were permitted to take deposits from individuals that are guaranteed by the government (up to $100,000 per account-holder, as of 2001). In return for the government deposit guarantee, commercial banks were prohibited from certain activities, including taking equity positions in firms and underwriting corporate securities. The prohibition on underwriting securities was gradually relaxed, first for debt securities and then for equity securities. In 1999, the Glass-Steagall Act was finally repealed, although deposit insurance remains. The key difference between commercial banks and investment banks in the corporate financing function is that commercial banks primarily act as long-term principals, making direct loans to borrowers, whereas investment banks primarily act as short-term principals. Since investment banks are selling to investors the securities that firms issue, the marketing of financial securities is important. This is a topic that has no reason for coverage in a Modigliani-Miller framework, where markets are perfect and there is no role for marketing. An important tool in the marketing of financial securities, especially equities, is research coverage (forecasts and recommendations) by security analysts. Since the investment banking firm providing research reports also underwrites offerings, this is referred to “sell-side” coverage. There is a perception that analyst coverage has become more important over time, partly because for many industries (i.e., biotechnology and technology companies), historical accounting information is of limited use in discerning whether new products and services will create economic value added. At the end of 2000, the Securities and Exchange Commission’s Regulation FD (fair disclosure) went into effect. This regulation may affect the role of analysts, for it requires that information that a corporation provides to analysts must be publicly disclosed to others as well. This chapter updates and extends previous surveys of the investment banking and securities issuance literature, notably Smith (1986) on the capital acquisition process, Eckbo and Masulis (1995) on seasoned equity offerings (SEOs), Ibbotson and Ritter (1995) on initial public offerings (IPOs), and Jenkinson and Ljungqvist (2001) on IPOs. For those interested in a comprehensive analysis of the literature on IPOs, the Jenkinson and Ljungqvist book goes into extensive detail. Ritter and Welch (2002) focus on the recent IPO literature, especially papers dealing with share allocations. Both the Smith survey and the Eckbo and Masulis survey are grounded in an equilibrium market efficiency framework, and neither discusses long-run performance issues. The Eckbo and Masulis survey has an extensive discussion of rights issues (equity issues where existing shareholders are given the right to purchase new shares at a fixed exercise price). Rights issues will not be covered here, partly because rights issues are not common in the U.S. and their use in other countries has been rapidly declining, and partly due to the excellent existing analysis. Many other topics in security issuance are mentioned in passing or not discussed at all. For example, will technology change the securities issuance process?