This research examines competition in the investment banking (securities brokerage) industry in the United States, as the competitive environment within the industry is defined by industry structure and the market behavior of the firms in the industry. Additionally, profitability performance within the industry, and the contribution of the industry to general economic growth are assessed.
Operational Functions of Investment
The major operational functions of investment banking firms are underwriting, dealing, brokerage, and the provision of financial advice (Pugel and White, 1985). The underwriting function involves origination, risk bearing, and distribution. Origination is concerned with defining the essential characteristics of an investment offering (debt or equity, pricing, timing, method of distribution, and so forth). Risk bearing on the part of an investment bank involves the purchase by a bank at a fixed price of a new securities issue, for eventual sale to the investing public (Pugel and White, 1985). In this context, the investment bank is at risk until the new issue is sold. Distribution is the act of selling the issue to the investing public. The provision of financial advice accompanies the underwriting function, although financial advice is also provided in other instances, such as, in conjunction with merger and acquisition decisions.
Underwriting is most frequently considered in terms of corporate issues. The underwriting function may, however, also involve government securities (Pugel and White, 1985). Some investment banks specialize in the underwriting of government securities.
In the underwriting of corporate issues, distinctions are made between (1) negotiated and competitive bid contracts, and (2) firm commitment and best effort contracts (Pugel and White, 1985). In negotiated contracts, the investment bank manager of an issue is selected by the corporate issuer through a process of ne...