Expert Advice in the Presence of Conflicts of Interest: The Case of Star-Crossed Acquisitions
60 Pages Posted: 9 Nov 2017 Last revised: 29 Jul 2021
Date Written: June 1, 2021
Expert advice is presumed to be more valuable, but when the expert has a conflict of interest, overcoming that conflict is difficult. We examine the performance of acquirers who hire an advisor that employs an expert – a star analyst – who covers the target and show that such “star-crossed” acquirers fare worse than other acquirers along multiple dimensions, including lower announcement returns and higher subsequent goodwill impairments. We consider multiple explanations for these outcomes, and the evidence strongly points toward star-crossed acquirers being unable to mitigate their advisors’ conflict of interest. Surprisingly, our analysis suggests that star-crossed managers are ex-ante uninformed about the low quality of the deals. Finally, we posit that given their expertise, a star-crossed advisor’s advantage is increasing in the opacity of the target firm’s accounting. Consistent with this, we find that in star-crossed deals only, acquirer announcement returns are decreasing in target opacity.
Keywords: analyst coverage, star analysts, M&A, goodwill, acquisition advisors
JEL Classification: G24, G34, K22, M41
Suggested Citation: Suggested Citation