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
EFA 2007 Ljubljana Meetings Paper
AFA 2008 New Orleans Meetings Paper
We study holdings in M&A targets by financial conglomerates 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, privy to important information about the deal, investing in the target in the expectation of its price to increase. We document the high profits of this strategy. We also document a positive relationship between the advisory stake and the deal characteristics. 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. These results provide new insights into the conflicts of interest affecting financial intermediaries simultaneously advising on deals and investing in equities.
Number of Pages in PDF File: 48
Keywords: inside trading, risk arbitrage, mergers and acquisitions
JEL Classification: G34, G23, G32
Date posted: March 1, 2007 ; Last revised: June 9, 2008
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