The International Diversification of Banks and the Value of their Cross-Border M&A Advice

Abstract

We examine the impact of the international diversification by banks on the value of their advice in 1,705 cross-border merger and acquisition transactions. We find that bidders engaging internationally diversified advisors face lower announcement returns. A one standard deviation increase in advisor diversification is associated with a 92 basis points lower announcement return for the bidder acquiring a listed target. The lower bidder returns are attributable to lower synergies of the deals being completed. Our evidence suggests that internationally diversified advisors offer lower quality advice to their clients since their reputational concerns are weakened by having access to multiple geographies from which they can derive fee-based income. We present further evidence that financial incentives in the form of advisor’s involvement in deal financing and market incentives in the form of the potential to gain market share in the bidder country may mitigate some of the negative effects of international diversification.

Keywords: Bank Diversification, Cross-Border Mergers and Acquisitions, Advisor Choice

JEL Classification: G24, G34