The Banking Relationship's Role in the Choice of the Target's Advisor in Mergers and Acquisitions

16 Pages Posted: 24 Aug 2010

See all articles by Gianfranco Forte

Gianfranco Forte

Università degli Studi di Milano-Bicocca - Department of Business Administration, Finance, Management and Law

Giuliano Iannotta

Università Cattolica

Marco A. Navone

Finance Discipline Group - UTS Business School; Bocconi University - CAREFIN - Centre for Applied Research in Finance; Financial Research Network (FIRN)

Abstract

We analyse the factors influencing the target company's choice of bank advisor in mergers and acquisitions (M&As). We first examine the choice of hiring an advisor, which is nontrivial, since in one-third of transactions our sample target companies did not hire one. We also analyse the choice to hire as advisor a bank with a strong prior relationship with the company (i.e., the main bank). Using data on 473 European M&A transactions completed in the period 1994–2003, we find evidence that the decision to hire an advisor depends on three main factors: (i) the intensity of the previous banking relationship, (ii) the reputation of the bidder company's advisor, and (iii) the complexity of the deal. We also investigate the impact of the bank advisor on shareholder wealth. We find that the abnormal returns of target company shareholders increase with the intensity of the previous banking relationship, thus indicating a ‘certification role’ on the part of investment banks.

Suggested Citation

Forte, Gianfranco and Iannotta, Giuliano and Navone, Marco A., The Banking Relationship's Role in the Choice of the Target's Advisor in Mergers and Acquisitions. European Financial Management, Vol. 16, Issue 4, pp. 686-701, September 2010. Available at SSRN: https://ssrn.com/abstract=1662693 or http://dx.doi.org/10.1111/j.1468-036X.2009.00481.x

Gianfranco Forte

Università degli Studi di Milano-Bicocca - Department of Business Administration, Finance, Management and Law ( email )

Edificio U7, IV piano
via Bicocca degli Arcimboldi
Milan, MI 8 - 20126
Italy

Giuliano Iannotta

Università Cattolica ( email )

20123 Milano
Italy

Marco A. Navone

Finance Discipline Group - UTS Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti, 25
Milan, 20136
Italy

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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