The Direct Cost of Advice in M&A Transactions in the Financial Sector

Abstract

Corporations do pay for legal and accounting advice whenever they face a major investment. For example companies that are involved in a merger activity often rely on external advice provided by accountants, legal experts, financial brokers etc. It is well known that mergers are heavy investments that entail large resources commitment. We use a special data set to analyze the cost of financial and accounting advice in merger situations. We find that the cost of advice are non-trivial, averaging over five million dollar per deal. The cost of merger advice explained a large share of the decline in acquiring-firm share holder wealth that is often observed in such transactions. We find that the primary determinants of these costs are the financial size of the deal and the complexity of the deal. We do not find that the method of payment for the acquisition itself affects the cost of the advice.

Keywords: advice, cost of advice, M&A, merger

JEL Classification: D40, G34