We model reputation acquisition by investment banks in the equity market. Entrepreneurs sell shares in an asymmetrically informed equity market, either directly, or using an investment bank. Investment banks, who interact repeatedly with the equity market, evaluate entrepreneurs' projects and report to investors, in return for a fee. Setting strict evaluation standards (unobservable to investors) is costly for investment banks, inducing moral hazard. Investment banks' credibility therefore depends on their equity-marketing history. Investment banks' evaluation standards, their reputations, underwriter compensation, the market value of equity sold, and entrepreneurs' choice between underwritten and nonunderwritten equity issues emerge endogenously.THE ROLE OF FINANCIAL intermediaries as information producers has been of considerable interest in finance (see, e.g., Leland and Pyle (1977) and Campbell and Keracaw (1980)). An important issue that arises here is that of the credibility of the intermediary. For instance, an investment bank marketing equity in a firm has an incentive to represent the firm's projects as worthy of investment, even if it has expended limited resources in investigating these projects. The problem is further complicated by the fact that even stringent evaluation procedures are subject to error, and intermediaries can make "honest" mistakes, making it difficult to distinguish between intermediaries acting in good faith and those acting in their own interest to the detriment of investors. In this paper, we argue that reputation acquisition by intermediaries can mitigate this credibility problem. We model the role of reputation acquisition in enabling an intermediary to act as a producer of credible information, and we derive implications for the valuation of financial securities sold by the intermediary. (the editors), and to two anonymous referees for several helpful suggestions. We alone are responsible for any errors or omissions. 58The Journal of Finance We develop our model in the context of an investment bank underwriting a stock issue. There are three kinds of agents in our economy: entrepreneurs, investment banks, and ordinary investors. Entrepreneurs approach the equity market to raise capital for their projects, entering the market only once and marketing equity either directly to investors or through an investment bank (underwriter). Investment banks are information producers that interact repeatedly with the equity market. They produce noisy evaluations of entrepreneurs' projects, which they report to investors when marketing equity in return for a fee from the entrepreneur. Ordinary investors determine the market value of the equity. Because investors do not observe the amount of resources investment banks devote to evaluating entrepreneurs' projects, they do not know how strict investment banks' standards are when they recommend investment in a firm. Investors therefore use the investment banks' past performance, as measured by the quality of firms in which they have previously s...

We model firms' choice between bank loans and publicly traded debt, allowing for debt renegotiation in the event of financial distress. Entrepreneurs, with private information about their probability of financial distress, borrow from banks (multiperiod players) or issue bonds to implement projects. If a firm is in financial distress, lenders devote a certain amount of resources (unobservable to entrepreneurs) to evaluate whether to liquidate the firm or to renegotiate its debt. We demonstrate that banks' desire to acquire a reputation for making the "right" renegotiation versus liquidation decision provides them an endogenous incentive to devote a larger amount of resources than bondholders toward such evaluations. In equilibrium, bank loans dominate bonds from the point of view of minimixing inefficient liquidation; however, firms with a lower probability of financial distress choose bonds over bank loans.

We address the question: At what stage in its life should a firm go public rather than undertake its projects using private equity financing? In our model a firm may raise external financing either by placing shares privately with a risk-averse venture capitalist or by selling shares in an IPO to numerous small investors. The entrepreneur has private information about his firm's value, but outsiders can reduce this informational disadvantage by evaluating the firm at a cost. The equilibrium timing of the going-public decision is determined by the firm's tradeoff between minimizing the duplication in information production by outsiders (unavoidable in the IPO market, but mitigated by a publicly observable share price) and avoiding the risk-premium demanded by venture capitalists. Testable implications are developed for the cross-sectional variations in the age of goingpublic across industries and countries. This article develops a model of the going-public decision of a firm and addresses the question, At what stage in its life should a firm go public rather than financing its projects through a private placement of equity (e.g., with a venture capitalist)? Beyond the fact that most firms start out as small private companies and at some point in their growth go public, we know relatively little about the trade-offs underlying a firm's choice between remaining private or going public. Indeed, beyond a general idea that going public allows the firm's shares to become more liquid, discussions of the goingpublic decision usually do not include a precise notion of the economic advantages or disadvantages of financing a firm's projects by going public We thank seminar participants at the 1996 WFA meetings, the 1996 JFI Symposium on Financial Intermediation and Corporate Finance, and the

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