Advisor Lending to the Advised Acquirer During M&A: Conflict of Interest or Last Resort Financing?

Abstract

Previous research has shown that acquirers’ M&A announcement effects, on average, become significantly positive if loan financing is involved. We find that when advisors lend to their advised acquirers during M&A deals, the syndicated loan spreads are unusually high, and the advisor-lender dual role significantly reduces the acquirers’ announcement effect. This appears to reflect conflicts of interest, undermining the information production/certification role of loan financing. However, evidence that high need for external finance justifies the expensive advisor lending supports a last-resort-financing explanation instead — investment banks act as a last resort through the advisor-lender dual role in M&A.

Keywords: M&A, Investment Banking, Advisor Lending, Conflict of Interest, Last Resort Financing

JEL Classification: G14, G23, G24, G34