Advisor-hedge fund connections and M&A Pricing: Who benefits from information flow?

Abstract

Using a sample of 2,117 US public M&A transactions from 2000 to 2019, we find evidence suggesting that bidders' advisors may share information about upcoming deals with connected hedge funds in exchange for implicit support of offer prices. Unexpected positions in target firms taken by hedge funds with prime brokerage ties to bidders' advisors before deal announcements are associated with lower premiums and reduced target abnormal returns, particularly for targets with high information asymmetry. This effect weakens when hedge funds can more independently identify potential targets or when bidders’ advisors hold shares in targets.

Keywords: Investment banking, Short-term hedge funds, Information asymmetry, Information leakage, Mergers and acquisitions

JEL Classification: G23, G24, G34