Information Production by Investment Banks: Evidence from Fairness Opinions

58 Pages Posted: 17 Mar 2007 Last revised: 15 May 2012

See all articles by Matthew D. Cain

Matthew D. Cain

Berkeley Center for Law and Business

David J. Denis

University of Pittsburgh

Date Written: May 1, 2012

Abstract

We analyze a direct product of the investment banking process: target firm valuations disclosed in the fairness opinions of negotiated mergers. On average, acquirer advisors exhibit positive valuation errors that are significantly greater than those of target advisors. Top-tier advisors produce more accurate valuations than lower-tier advisors, but we find no relation between valuation accuracy and the contingency structure of advisory fees. The stock price reactions to merger announcements and to the public disclosure of target-sought fairness opinions are positively related to the difference between target firm valuations contained in the fairness opinion and the merger offer price. We conclude that investment banks produce information not previously available to market participants through the rendering of target-side fairness opinions.

Keywords: fairness opinions, investment banks, contingent fees, mergers, valuation

JEL Classification: G24, G34

Suggested Citation

Cain, Matthew D. and Denis, David J., Information Production by Investment Banks: Evidence from Fairness Opinions (May 1, 2012). AFA 2008 New Orleans Meetings Paper, Journal of Law and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=971069 or http://dx.doi.org/10.2139/ssrn.971069

Matthew D. Cain (Contact Author)

Berkeley Center for Law and Business ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

David J. Denis

University of Pittsburgh ( email )

Katz Graduate School of Business
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
885
Abstract Views
4,263
Rank
49,785
PlumX Metrics