Informed Intermediaries

A characteristic of investment banks is that they can acquire information on securities and hence do not act as an uninformed intermediary but have to be treated as informed. Therefore, the actions taken by investment banks will in general contain information that other, uninformed, market participants can infer from their actions. In Sect. 4.1, we will see how investment banks can reduce the problem of adverse selection in capital market transactions and ensure transactions of high-quality securities can be completed. It is not only that investment banks affect the ability to trade existing securities, but they might also affect the quality of securities that are brought to the market in the first place, as Sect. 4.2 shows. In this way, they have the potential to change the composition of securities in the market.