Advisor-Hedge Fund Connections, Information Flows and Deal Outcomes in Mergers and Acquisitions

Abstract

This paper examines the impact of investment banks' prime brokerage connections to hedge funds on the choice of an advisor and the deal outcome in M&As. Acquirers are more likely to choose advisors connected to hedge funds that hold equity in the target before the deal announcement. Such connections reduce deal duration, increase the likelihood of deal completion, and increase the acquirer abnormal return when target firms are characterised by a high degree of information asymmetry, suggesting an 'indirect toehold' mechanism of information transmission.

Keywords: Choice of advisor, relationship banking, hedge fund holdings, indirect toehold, information advantage, mergers and acquisitions

JEL Classification: G23, G24, G34