Intermediation in the Market for Corporate Control

Abstract

This paper analyzes the role of intermediation in the market for corporate control (mergers and acquisitions). I argue that given the decentralized nature of such market, financial intermediaries might help alleviating search frictions. A potential acquirer can search for acquisition targets directly or hire an intermediary to conduct the search. In equilibrium, the extent of the search friction depends not only on skill but also on the endogenous number of firms that can be acquired. I find that even when acquirers have a search advantage over intermediaries, an equilibrium where both types of search, intermediated and direct, coexist might arise. Moreover, the model characterizes the advisory industry and fees, rationalizes existing evidence on the role of advisors and provides new implications for the role and importance of intermediaries in aggregate M&A dynamics.

Keywords: advisor, investment banking, intermediation, matching, mergers and acquisitions, search frictions, synergies

JEL Classification: G24,G31, G32, G34