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THEORETICAL ANALYSIS OF FINANCIAL FUNCTIONALITY

[1]

Particularities of Securities Issuance and Trading

Similar to the situation in product and labor markets, asymmetric information also exists in capital markets. The asymmetry problem is even worse between fund seekers and investors. In such a capital and information-intensive market, fund seekers with limited financial strength aim to attract investors to invest money in their business, while investors are eager to get company information (e.g., business model, innovation, and management) to determine potential growth prospects before making an investment decision. As financial intermediaries, securities firms come in at this point to help both parties. To some extent, securities firms supply investors with a special commodity: price-related information. It is securities firms that facilitate the pairing of funds in the market with projects and companies, bringing about the exchange of information and capital flows.

Such exchange works on the premise that the parties to the exchange have specific ownership of their respective products. The price-related information in capital markets is unlike general tangible goods. It is difficult to establish property rights to such information, even though it is of great value. The difficulty lies in the following areas:

- How to prove to potential investors the value of such information for the purpose of reasonable consideration

- How to clearly identify an information producer as the source of the information obtained by certain investors who should be charged for the use of such information

From the investors' perspective, how to make sure the information owner will not resell such information, which would lose value as a result of wide dissemination

Market economy is in a sense bound by covenants. However, even a legally binding contract cannot have much effect in a market of price-related information for the following three reasons:

1. A covenant simply cannot be formed with an agreement whose existence is questionable, whose subject (information) cannot be confirmed as to quality and effectiveness, and whose consequences and terms and conditions cannot be verified

2. The law simply cannot offer protection in the absence of a valid accusation because there is no proven approach to determine how a specific investor benefits from certain information from an information producer.

3. Even if the above two obstacles were removed, there would be no proven approach to ensure the confidentiality of such information in the course of discovery or proceeding. The value of the information would diminish substantially once it had been widely disseminated.

  • [1] For detailed discussion of the functionality of investment banking, please Morrison and Wilhelm (2006).
 
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