Investment Banks as Insiders and the Market for Corporate Control
University of Notre Dame - Mendoza College of Business
INSEAD - Finance
Michigan State University - Eli Broad Graduate School of Management; Centre for Economic Policy Research (CEPR); Gaidar Institute for Economic Policy; SITE
The Review of Financial Studies, Vol. 22, Issue 12, pp. 4989-5026, 2009
We study holdings in merger and acquisition (M&A) targets by financial conglomerates in which affiliated investment banks advise the bidders. We show that advisors take positions in the targets before M&A announcements. These stakes are positively related to the probability of observing the bid and to the target premium. We argue that this can be explained in terms of advisors who are privy to important information about the deal, investing in the target in the expectation of its price increasing. We document the high profits of this strategy. The advisory stake is positively related to the likelihood of deal completion and to the termination fees. However, these deals are not wealth creating: there is a negative relation between the advisory stake and the viability of the deal.
Keywords: G23, G32, G34Accepted Paper Series
Date posted: November 24, 2009
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