Capital Market Equity Initial Public Offerings and Corporate Bond Origination
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Capital markets are much more impersonal than bank lending, and the investor in such markets is unlikely to have any personal knowledge of the management of the firm to whom he or she is providing financing, unlike a bank manager who is likely to have met a corporate borrower. As a result, there have to be other mechanisms to try to ensure that the potential investor is not investing in an excessively risky company, has the necessary information to enable an effective evaluation of risk and that he or she is kept informed regularly of developments in the company. Essentially, therefore, for capital markets to function effectively, there have to be mechanisms to overcome asymmetric information problems.
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