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Do Investment Banks Have Skill? Performance Persistence of M&A Advisors

Jack Bao
Ohio State University - Department of Finance

Alex Edmans
University of Pennsylvania - The Wharton School


July 12, 2009

EFA 2007 Ljubljana Meetings Paper

Abstract:     
We document significant persistence in the average announcement returns to acquisitions advised by an investment bank. Advisors in the top quintile of returns over the past two years outperform the bottom quintile by 1.04% over the next two years, compared to a full-sample average return of 0.72%. Persistence continues to hold after controlling for the component of returns attributable to the acquirer. These results suggest that advisors possess skill, and contrast earlier studies which use bank reputation and market share to measure advisor quality and find no link with returns. Our findings thus advocate a new measure of advisor quality – past performance. However, acquirers instead select banks based on market share, even though it is negatively associated with future performance. The publication of league tables based on value creation, rather than market share, may improve both clients’ selection decisions and advisors’ incentives to turn away bad deals.

Keywords: Investment Banking, Persistence, Mergers & Acquisitions

JEL Classifications: G24, G34

Working Paper Series

Date posted: December 21, 2006 ; Last revised: July 13, 2009

Suggested Citation

Bao, Jack and Edmans, Alex, Do Investment Banks Have Skill? Performance Persistence of M&A Advisors (July 12, 2009). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: http://ssrn.com/abstract=952935


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Contact Information

Alex Edmans (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
Jack Bao
Ohio State University - Department of Finance ( email )
2100 Neil Avenue
814 Fisher Hall
Columbus, OH 43210-1144
United States
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