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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26611
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| Title: | The Role of Bank Advisors in Mergers and Acquisitions |
| Authors: | Allen, Linda
Jagtiani, Julapa
Peristiani, Stavros
Saunders, Anthony |
| Keywords: | Relationship banking
investment bank advisors
commercial bank advisors
commercial bank advisors
conflict of interest effect
mergers
acquisitions |
| Issue Date: | Dec-2001 |
| Series/Report no.: | FIN-01-058 |
| Abstract: | This paper looks at the role of commercial banks and investment banks as
financial advisor's. Unlike some areas of investment banking, commercial
banks have always been allowed to compete directly with traditional
investment banks in this area. In their role as lenders and advisor's,
banks can be viewed as serving a certification function. However, banks
acting as both lenders and advisor's face a potential conflict of
interest that may mitigate or offset any certification effect. Overall,
we find evidence of the certification effect for target firms, but
conflicts of interest for acquirers. In particular, the target earns
higher abnormal returns when the target’s own bank certifies the
(more information ally opaque) target’s value to the acquirer. In
contrast, we find no certification role for acquirers. This may be due
to two reasons. First, certification plays less of a role for acquirers
because it is the target firm that must be priced in a merger. Second,
acquirers predominantly utilize commercial bank advisor's in order to
obtain access to bank loans that may be used to finance the post-merger
transition period. Thus, we find that acquirers tend to choose their own
banks (those with prior lending relationships to the acquirer) as
advisors in mergers. However, this choice weakens any certification
effect and creates a potential conflict of interest because the
acquirer’s advisor negotiates the terms of both the merger
transaction and future loan commitments. Moreover, the advisor’s
merger advice may be distorted by considerations related to the
bank’s credit exposure resulting from both past and future lending
activity. The market prices these conflicts of interest; we find
significantly negative abnormal returns for bank advisor's when they
advise their own loan customers in acquiring other firms. |
| URI: | http://hdl.handle.net/2451/26611 |
| Appears in Collections: | Economics Working Papers
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