That seems to be the conclusion of a NYT column bemoaning new rules that restrict contact between the bankers who underwrite new stock issues and stock analysts. The column presents the argument of Frank Quattrone, an investment banker who was accused of obstruction of justice charges in connection with passing along biased research. (The charges were dropped.) Mr. Quattrone argues that the restrictions on contact with bankers make it too expensive to research small firms. As a result, there is little information available to investors about these firms. That makes investors more reluctant to buy their stock, which makes it more difficult for them to raise capital through the stock market. It would have been appropriate to note, that the misinformation that was spread prior to the imposition of restrictions to limit conflicts of interest, caused many new stock issues to be hugely over-valued. While this led to enormous bonanzas to many entrepreneurs who started worthless companies, for the larger economy it implied a huge mis-allocation of capital. Money that could have been used productively in established firms was instead funneled to businesses that were destined to bankruptcy. There are alternatives to raising capital through public issues of stock, which small companies have long pursued (e.g. bank loans and venture capital). The most obvious implication of Mr. Quattrone's comments is that many small companies should not be looking to the stock markets as a source of capital. The column should have made this point.
--Dean Baker