Investment Banking Relationships and Merger Fees

38 Pages Posted: 11 Nov 2008

See all articles by Anthony Saunders

Anthony Saunders

New York University - Leonard N. Stern School of Business

Anand Srinivasan

CAFRAL, Reserve Bank of India; National University of Singapore - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

Abstract

This paper is among the first to investigate the effect of a prior investment banking relationship on merger advisory fees paid by acquiring firms. We find that acquiring firms pay a higher fee to advisors when they have had a continuing relationship and a lower fee when they switch to an advisor with whom they have had no prior relationship. We develop a measure of relationship strength between an acquiring firm and its merger advisor based on previous debt, equity and merger transactions completed by the acquiring firm. We also examine the relationship between a merger advisor s reputation and its ability to retain clients. We find that firms are more likely to switch if their M and A advisor is not a top tier investment bank. To test if higher fees are compensation for better performance, we examine differences between the average announcement returns of acquiring firms that switch advisors and those that do not. We find no significant difference between these two return samples. Overall, our findings indicate that acquiring firms perceive benefits of retaining merger advisors with whom they have had a prior relationship (even at the cost of higher fees) and/or they face some other (higher) costs of switching to new bank advisors.

Suggested Citation

Saunders, Anthony and Srinivasan, Anand, Investment Banking Relationships and Merger Fees (October 2001). NYU Working Paper No. S-FI-01-07. Available at SSRN: https://ssrn.com/abstract=1298849

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Anand Srinivasan

CAFRAL, Reserve Bank of India ( email )

C-8, 8th Floor, Reserve Bank of India
Bandra-Kurla Complex, Bandra (East)
Mumbai, Maharashtra 400051
India

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

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