Merchant Banking

Topics: Bank, Investment banking, Banking Pages: 23 (6564 words) Published: December 1, 2012
Cross Country Comparison of Efficiency in Investment Banking


Nemanja Radić
University of Rome ’’Tor Vergata’’, Doctorate of Research in Banking and Finance, Via Columbia 2, Rome, Italy,

Franco Fiordelisi
University of Rome ’’Federico Caffè’’, Department of Management and Law, Rome, Italy,

This paper aims to identify the framework for comparing investment banks efficiencies across nations. In order to overcome traditional limitations two methods are adopted: first, where separate frontiers are estimated to check for the existence of structural differences between the countries; and second method which accounts for the influences of environmental factors on the industry, by including indicator of these factors in a definition of a common frontier. We use translog cost and profit function in order to measure X-efficiency. Data set consist from more than 900 investment banks from G7 countries (US, UK, Japan, Italy, Germany, France and Canada) and Switzerland over the period 2000-2007.



Motivation and Introduction

Investment banking industry on the world level has gone through incredible transformation due to cross border activities and consolidation. Today more and more banks are crossing international borders and providing services around world. Having in mind the business of investment banking and newest trends, we can say that efficiency of these types of banks is important for several reasons. First, investment bank engage in public and private market transaction for corporations, governments and investors, and by doing so is making benefits for all the participants. Second, efficiency of these institutions affect the financial markets and the ability of investment banks to minimize costs or maximizes profits is important both for them and for their clients. Third, by exercising their powers and by improving their efficiency, these institutions improve certain industry segments (this refers to boutique investment banks). We can define investment banking as the intermediation between issuers and investors through the core function of advisory, M&A, debt capital markets and equity capital markets. A number of environmental trends as well as the creativity and dynamism of their professional teams have shaped today’s investment banks. Most of the researchers and analysts agree that the key drivers of the phenomenal secular growth of the business have been: GDP growth and stock market prices; globalization through cross border investment flows (cross border mergers and acquisitions in the developed world as well as direct and portfolio investment in emerging markets); the accumulation of assets managed by institutions (growing share of GNP wealth managed by institutions such as pension funds has created a well structured market for investment banks); securitization (has represented a direct economical transfer from commercial to investment banks); deregulation.1 Gardener and Molyneux (1995) have identified similar factors that affect and influence the evolution of investment banking, such as: real per capita income and wealth, economic forces that directly affect investment banking services through technological advances, the regulatory framework affects, distribution of property rights and the way that they are exercised. Due to specific nature of this research and complexity of the investment banking business, we provide the literature definition of the same, where: ’’Investment bank’s business can be categorized into five main areas: broking (the broking of securities is commodity business in which firms appeal to customers mainly on 1

For further readings see Davis (2003)


price and integrity); trading (the trading of securities drives on market volatility); investment banking (represents the underwriting of new issues and advisory work also referred to as Mergers and Acquisitions); fund management (includes both retail...
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