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1. INVESTMENT BANKS &
SECURITIES ANALYSTS
CHAPTER 5

2. What is an Investment
Banks?
• It Offer a variety of services:
1. (noted) in selling new created securities
2.They become specialist (new & old firms)
3. intermediaries /consultants
4. involved in issuing new securities
5. evaluate their client firms needs & bring investment
opportunities in the market
6. issue final prospectus to the investors
SECURITIES:
--STOCKS & BONDS

3. What is Securities Analysts?
 They evaluate securities & make buy or sell
recommendations to their clients
 They review securities that are already issued
 Make earning forecasts for the firms they follow
 Work for IB or Financial Advisory firms ( brokers or
financial advisors, consultants )
 Possess better information about a company
 Monitor the firms & identify problems of the
shareholders
 Sell “good securities”

4. IB Activities:
 To help companies issue new debt
(bonds) and equity securities
 Advises companies on the securities
with a fee (risk) to issue the securities

 2 methods to issue stocks & bonds
1. Underwriting
2. Best Effort

5.  Underwriting
- guarantee the company to receive a
specific amount of capital
-bankers assure that a certain shares
will sell at a target price
 Best Effort
-don’t want to take risk on the security
issue
- doesn’t guarantee to get desired capital
- risk is low & fee is low

6.  “road show”
-marketing campaign done by the I B
to generate interest & to market the
issue
-large institutional investors (pensions
& mutual funds)
-individual investors (IB use brokers)
*IPO ( Initial Public Offering)
- firms are young, small and unknown
to investors
- underprice offering to mitigate the
risk

7. CRITICISMS OF I.B.
 IPO PROBLEMS
-few small businesses would make a
good public companies
-would not work effectively as large
national firms
- not capable of running a large
business
-need bank customers & connections
-bad signal to investor if no market
professional involved

8.  IPO becomes public only if:
-good management team
-with quality bus. plan
-profit earned in the past 3 quarters
* Structured Deals
-organized, plan & controlled of IB
- IB may help by arranging for non-
traditional financing from a large
investors or investment group (SPE)

9. 2 categories of Analysts
1. Buy side Analyst
- are institutional investors ( pension&
mutual funds)
-help the fund which stocks should buy
-recommendations are not for public
- fund managers manage individual
investors (retirement accounts)

10. 2. Sell side Analyst
- the brokerage & the IB
- analyst research gain interest on
security through trading commissions or
underwriting business
- act as a salespeople for the stocks
-recommendation made public
-check the operating & financial
conditions of the firms
-make earning forecast (EPS) numbers
-trading recommendations
(accumulate, market perform or neutral)

11. Quality of Analyst
Recommendations
*Conservative
- analyst make earning forecast lower
than the actual earnings
• Regulation Fair Disclosure (SEC)
- Prevented the firms from divulging
private information to any analyst
- Create a level playing field for all
investors

12. Potential Conflict of Interest
 Analyst may have their hands tied,
they want to be objective but their
objectivity may prevent them to future
info. (firm mgt)
 familiarity with the manager would
hinder its purpose

13. Analysts working with IB
 Chinese Wall
-separation of the analyst and the
banker within the banks
• They become sales people &
promoters, instead of objective
analyzer of financial performance of
the client
• compromise their recommendations
with IB