Do Financial Advisors Matter for M&A Pre-Announcement Returns? *

Abstract

This study documents economically meaningful and persistent financial advisor fixed effects in target firms' abnormal stock returns shortly prior to takeover announcements. Advisor location, reputation, and type explain variation in target returns. Additional difference-in-differences analyses further support the systematic relation between advisors and returns: the latter are significantly lower after senior staff of advisors were defendants in SEC insider trading enforcement actions. The evidence enhances our understanding of the prevalent phenomenon of pre-bid stock returns. It contributes to the inconclusive literature on banks’ exploitation of private information gained via advisory services, which so far has relied only on disclosed, traceable activities indicative of information leakage.

Keywords: JEL classification: G14, G15, G21, G34, K42 Financial Advisors, Mergers and Acquisitions, Information Leakage, Target Runups

JEL Classification: G14, G15, G21, G34, K42