Do Investment Banks Have Incentives to Help Clients Make Value‐Creating Acquisitions?
17 Pages Posted: 30 Nov 2016
Date Written: Summer 2016
Many have long suspected that investment banks, when advising corporate clients on potential acquisitions, have strong incentives just to “get the deal done” with little if any motive for urging clients to walk away from “bad” deals. The incentive to complete deals comes from compensation arrangements in which the bulk of the bankers' fees depend upon completion of the deals. Several earlier studies have provided support for this suspicion by reporting findings that show banks' market shares of advisory services depending mainly on two variables - their previous market shares and their deal completion rate - with little if any connection to the value created (or destroyed) for their clients' shareholders. In their recently published study, the authors revisit that relationship and reach a number of different conclusions: (1) advisors in acquisitions that create more value for clients are more likely to be chosen for future deals; (2) the changes in bankers' advisory market shares are strongly related to the value created for prior clients; and (3) the changes in banks' market values are positively correlated with the value created for their acquirer clients. In sum, the findings suggest that banks have significant market‐related incentives to advise their clients to pursue value‐creating acquisitions and to avoid deals likely to reduce their market values.
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