The Role of Bank Advisors in Mergers and Acquisitions

FRB of New York Staff Report No. 143

NYU Stern Department of Finance Working Paper No. FIN-01-058

50 Pages Posted: 14 Dec 2001

See all articles by Linda Allen

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Stavros Peristiani

Federal Reserve Bank of New York--Retired

Anthony Saunders

New York University - Leonard N. Stern School of Business

Multiple version iconThere are 4 versions of this paper

Date Written: January 2002

Abstract

This paper looks at the role of both commercial and investment banks in providing merger advisory services. In this area, unlike some areas of investment banking, commercial banks have always been allowed to compete directly with investment banks. In their dual role as lenders and advisors to firms that are the target or the acquirer in a merger, banks can be viewed as serving a certification function. However, banks acting as both lenders and advisors face a potential conflict of interest that may mitigate or offset any certification effect. Overall, we find evidence supporting the certification effect for target firms. In contrast, conflicts of interest appear to dominate the certification effect when banks are advisors to acquirers.

In particular, the target earns higher abnormal returns when the target's own bank certifies the (more informationally opaque) target's value to the acquirer. In contrast, we do not find a certification role for acquirers. There are two possible reasons for these different outcomes. First, it is the target firm, not the acquirer, that must be priced in a merger. Second, acquirers predominantly use commercial bank advisors to obtain access to bank loans that may be used to finance the merger. Thus, we find that acquirers tend to choose their own banks (those with prior lending relationships to the acquirer) as advisors in mergers. However, this choice weakens any certification effect and creates a potential conflict of interest because the acquirer's advisor negotiates the terms of both the merger transaction and future loan commitments. Moreover, the advising bank's recommendations may be distorted by considerations related to credit exposure incurred in both past and future lending activity. The market prices these conflicts of interest; we find significantly negative abnormal returns for bank advisors when they advise their own loan customers in acquiring other firms.

Keywords: relationship banking, investment bank advisors, commercial bank advisors, mergers and acquisitions

JEL Classification: G21

Suggested Citation

Allen, Linda and Jagtiani, Julapa A. and Peristiani, Stavros and Saunders, Anthony, The Role of Bank Advisors in Mergers and Acquisitions (January 2002). FRB of New York Staff Report No. 143; NYU Stern Department of Finance Working Paper No. FIN-01-058. Available at SSRN: https://ssrn.com/abstract=293795 or http://dx.doi.org/10.2139/ssrn.293795

Linda Allen (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

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HOME PAGE: http://stern.nyu.edu/~lallen

Julapa A. Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Stavros Peristiani

Federal Reserve Bank of New York--Retired ( email )

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Apartment 1C
Bronx, NY New York 10463
United States
718-796-5190 (Phone)

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

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9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

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