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

See all articles by Gil Aharoni

Gil Aharoni

University of Melbourne; Financial Research Network (FIRN)

Bryan Lim

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Jordan Neyland

Antonin Scalia Law School - George Mason University

Date Written: June 1, 2021

Abstract

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

Aharoni, Gil and Lim, Bryan and Litov, Lubomir P. and Neyland, Jordan, Expert Advice in the Presence of Conflicts of Interest: The Case of Star-Crossed Acquisitions (June 1, 2021). George Mason Law & Economics Research Paper No. 17-46, Available at SSRN: https://ssrn.com/abstract=3066968 or http://dx.doi.org/10.2139/ssrn.3066968

Gil Aharoni

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Bryan Lim

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Jordan Neyland (Contact Author)

Antonin Scalia Law School - George Mason University ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

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