The Strategic Choice of Peers in M&A Valuations

Abstract

We examine the strategic choice of peer comparables in fairness opinions (FOs) used in M&A valuations. Using a hand-collected sample of peer comparable analyses and a regulatory shock to appraisal lawsuit risk, we show that target-sought FOs employ lower-valued peers when litigation risk is higher. Cross-sectionally, the bias is stronger when the target CEO is retained and owns fewer shares in the target. Although the selection of downward-biased peers reduces appraisal lawsuit likelihood, it is also associated with lower premiums. We conclude that FO valuations are driven, at least in part, by the strategic motive to mitigate litigation risk.

Keywords: Mergers; Fairness opinions; Peer groups; Benchmarking

JEL Classification: G24, G30, G34