manage "commingled funds," in which the monies of different clients with similar goals are merged into a "mini-mutual fund," which is run according to the common preferences of those clients. We discuss investment companies in greater detail in Chapter 4. Economies of scale also explain the proliferation of analytic services available to in- vestors. Newsletters, databases, and brokerage house research services all exploit the fact that the expense of collecting information is best borne by having a few agents engage in research to be sold to a large client base. This setup arises naturally. Investors clearly want information, but, with only small portfolios to manage, they do not find it economical to in- cur the expense of collecting it. Hence a profit opportunity emerges: A firm can perform this service for many clients and charge for it.     Investment Banking   Just as economies of scale and specialization create profit opportunities for financial inter- mediaries, so too do these economies create niches for firms that perform specialized ser- vices for businesses. We said before that firms raise much of their capital by selling securities such as stocks and bonds to the public. Because these firms do not do so fre- quently, however, investment banking firms that specialize in such activities are able to of- fer their services at a cost below that of running an in-house security issuance division. Investment bankers such as Merrill Lynch, Salomon Smith Barney, or Goldman, Sachs advise the issuing firm on the prices it can charge for the securities issued, market condi- tions, appropriate interest rates, and so forth. Ultimately, the investment banking firm han- dles the marketing of the security issue to the public. Investment bankers can provide more than just expertise to security issuers. Because in- vestment bankers are constantly in the market, assisting one firm or another to issue secu- rities, the public knows that it is in the bankers interest to protect and maintain its reputation for honesty. The investment banker will suffer along with investors if it turns out that securities it has underwritten have been marketed to the public with overly optimistic or exaggerated claims, for the public will not be so trusting the next time that investment banker participates in a security sale. The investment bankers effectiveness and ability to command future business thus depends on the reputation it has established over time. Ob- viously, the economic incentives to maintain a trustworthy reputation are not nearly as strong for firms that plan to go to the securities markets only once or very infrequently. Therefore, investment bankers can provide a certification role-a "seal of approval"-to I. Introduction 1. The Investment Environment The McGraw−Hill Companies, 2001           CHAPTER 1 The Investment Environment 13