Conflicts of Interest in Merger Advisory Services

38 Pages Posted: 18 Feb 2004

See all articles by Linda Allen

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Stavros Peristiani

Federal Reserve Bank of New York--Retired

Date Written: February 2004

Abstract

Conflicts of interest in combining lending with the merger advisement of acquiring firms are found using two separate methodologies. First, commercial banks that advise acquirers with which they have had a prior lending relationship experience a significantly negative abnormal return, averaging 37 basis points over the 3-day period surrounding the merger announcement date. Second, syndicated bank loans that are arranged by the acquirer's advisor after the merger announcement date trade at a significant discount in the secondary market, averaging 4.15%, as compared with syndicated bank loans arranged by banks with no advisory role. Moreover, general-purpose syndicated bank loans originated less than one year after the merger announcement date and arranged by the acquiring firm's advisor trade at an average discount of roughly 12% in the secondary loan market. Since the terms on these general-purpose loans are not set upon merger announcement, they are most subject to risk shifting and underpricing agency problems. These findings offer evidence consistent with the existence of conflicted loans (at below market terms) that are offered by the acquirer's commercial bank advisor in order to win merger advisory business.

Keywords: Relationship banking, investment bank advisors, commercial bank advisors, certification effect, conflict of interest effect, mergers, acquisitions

JEL Classification: G21

Suggested Citation

Allen, Linda and Peristiani, Stavros, Conflicts of Interest in Merger Advisory Services (February 2004). Available at SSRN: https://ssrn.com/abstract=501022 or http://dx.doi.org/10.2139/ssrn.501022

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-3463 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://stern.nyu.edu/~lallen

Stavros Peristiani (Contact Author)

Federal Reserve Bank of New York--Retired ( email )

3001 Henry Hudson Pkwy W
Apartment 1C
Bronx, NY New York 10463
United States
718-796-5190 (Phone)

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