Does the Use of Fairness Opinions Impair the Acquirers' Abnormal Returns? The Litigation Risk Effect

Abstract:     
We examine the effect of the use of fairness opinions by acquirers on acquirers' short-term market performance. Our paper is the first to examine the effect of using fairness opinions on acquirers' abnormal returns around merger announcements. We hypothesize that acquirers purchase fairness opinions to reduce their potential litigation risk. Our results are consistent with this view that acquirers with fairness opinions underperform those without fairness opinions. The effect is more pronounced in the groups with higher litigation risk. Moreover, acquirers with higher litigation risk are more likely to purchase fairness opinions from investment bankers. Our paper raises the concern over the value of fairness opinions in mergers and acquisitions.

Keywords: Mergers and Acquisitions, Announcement Returns, Litigation Risk, Fairness Opinions, Corporate Governance

JEL Classifications: G34, G14, G38, G24, M41, M49, K22

Working Paper Series