The Rise and Fall of Investment Banking: Theory of the Firm Edition

For those of you taking a break from trivia to study for a 450 Exam, Daniel Gross gives a broad brush account of the importance of ownership structure and agency issues. Here’s the basic argument: (1) investment banks go public (i.e., allow members of the public to buy ownership shares); (2) raising equity capital allows banks to expand and compete with international considerations; (3) growth in size correlated with a growth in clout, whereby banks effectively “captured” regulators; (4) growth in size led to acute agency problems, whereby management plundered shareholders a la Berle and Means.

Whew, that was fast.