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This paper analyzes the welfare implications of banks taking equity stakes in firms under conditions of imperfect information and moral hazard. Two cases of bank control over investment decisions are analyzed. In the first, the bank does not control the investment decisions of the firm. Here, the investment efficiency is higher and bank risk is lower for an optimal positive level of bank equity holdings. However, in the case when the bank has veto power over investment proposals by the firm, there is a trade off between increased investment efficiency and increased bank risk.

The primary market is the place where securities are created. There are a number of different processes for raising capital in the primary market. When the investment bank and company raising capital decide on the best form for a specific financing, the investment bank is given the task of defining and creating the chosen instrument. The investment bank must decide when to bring the security to market and the initial price to put on the security. In addition, the investment bank has a number of specific notification requirements, both to regulators and to prospective buyers. These requirements vary from country to country, but generally, the firm must specifically describe the prospects and possible risks for a prospective buyer. When the regulatory process is complete, the investment bank selects an issuing date and announces it publicly. On the selected date, the investment bank establishes the price for the securities and, typically, using a syndicate of other firms, undertakes to sell the securities to the public and institutional investors.