Information Production by Investment Banks: Evidence from Fairness Opinions
Matthew D. Cain
U.S. Securities and Exchange Commission
David J. Denis
University of Pittsburgh
May 1, 2012
AFA 2008 New Orleans Meetings Paper
Journal of Law and Economics, Forthcoming
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.
Number of Pages in PDF File: 58
Keywords: fairness opinions, investment banks, contingent fees, mergers, valuation
JEL Classification: G24, G34
Date posted: March 17, 2007 ; Last revised: May 15, 2012
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