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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27202
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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
certification effect
conflict of interest effect
mergers
acquisitions |
| Issue Date: | Dec-2001 |
| Series/Report no.: | S-FI-01-10 |
| Abstract: | This paper looks at the role of commercial banks and investment banks as
financial advisors. 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 advisors,
banks can be viewed as serving a certification function. However, banks
acting as both lenders and advisors 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
informationally 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 advisors 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
advisors when they advise their own loan customers in acquiring other firms. |
| URI: | http://hdl.handle.net/2451/27202 |
| Appears in Collections: | Financial Institutions
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