What Is the Relationship between Corporate Finance and Investment Banking?

Investment banking provides companies with a variety of business services, such as issuing financial securities or managing mergers or corporate reorganizations. The link between corporate finance and investment banking exists because the bank needs to determine the financial returns from the activity. Different corporate finance activities include the payback period and net present value, among others. Using an investment bank outsources these activities from the company.

Large organizations might have a corporate finance department or team of employees to complete these activities. This can be a benefit in terms of lower costs, but the company might lose objectivity when assessing major business projects or operational alterations. This is the reason for the outsource link between corporate finance and investment banking. Hiring an investment bank to review or assess changes will often improve objectivity in the decision analysis phase. Publicly held companies are often heavy users of investment banking services.

One portion of corporate finance activities includes creating and maintaining capital structure. This structure represents the amount of debt and equity financing that a company uses to pay for large business projects. When using equity financing, a company will often sell stock to the public or specific investors. Either way, an investment bank usually is necessary to meet the legal requirements for issuing securities. All companies would need an investment bank for this purpose, establishing a link between corporate finance and investment banking.

Although most companies that need funds or are seeking merger advice will use investment banking, other companies might use these services as well. For example, a company might hire an investment bank to find business partners for a merger or acquisition process. This is a sort of preemptive corporate finance move. Companies that are financially weak will often use an investment bank to find suitors who are willing to purchase a large stake in the business. Even though a company goes through this analysis phase of corporate finance and investment banking, it does not mean that the company will go through the merger or acquisition.

Not all companies will need to use an investment bank to assess corporate finance activities. Small and mid-size businesses might use a public accounting firm or consultant to assess these activities. This saves money for smaller businesses and often provides them with a professional service for use on other activities or projects. In other cases, a company might discover that it does not need investment banking services. Therefore, corporate finance activities will not result in a link with investment banking.