How Often Do 'Conflicts of Interests' in the Investment Banking Industry Arise During Hostile Takeovers?

32 Pages Posted: 28 Feb 2004

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Hal J. Singer

Econ One

Date Written: February 26, 2004


We analyze all hostile takeovers in the past ten years where the market capitalization of the target firm exceeded $1 billion and the identity of the financial advisor of the acquirer is known. Our analysis reveals that, in the majority of cases, at least one of the advisors for the acquirer previously represented the takeover target in some way. The existence of overlapping relationships provides incentives for clients and investment banks to limit flows of private information about clients. If a firm believes that material secret information about its business that is to be revealed to an investment bank would be of interest to a competitor or potential acquirer, then that firm may obtain assurances or a written agreement about disclosure from the investment bank to ensure the confidentiality of the information. Similarly, if a bank believes that there is potential for a conflict to arise among clients relating to private information, it will often decide that it is appropriate to restrict access to that information within the investment bank by constructing a Chinese wall. Next, we test whether acquisition premia are significantly different for the acquisitions where there is a potential conflict. We find no significant differences in the means. However, we find somewhat significant differences in the variances of the two samples, which suggests that buyers with inside information may be more discriminating, both in choosing their acquisition targets and in determining the premia offered. Finally, we propose an economic test for determining whether private information has been transmitted to an acquirer, and the materiality of that private information, when an investment bank faces a potential conflict of interest, and we apply that test to a specific case involving a hostile takeover.

Keywords: Conflicts of interest, investment bank, hostile takeovers, acquisition premia, Chinese Wall

JEL Classification: G2, G24, G28, G3, G34, G38, G00, G1, G14

Suggested Citation

Calomiris, Charles W. and Singer, Hal J., How Often Do 'Conflicts of Interests' in the Investment Banking Industry Arise During Hostile Takeovers? (February 26, 2004). Available at SSRN: or

Charles W. Calomiris

Columbia University - Columbia Business School ( email )

3022 Broadway
601 Uris, Dept. of Finance & Economics
New York, NY 10027
United States
212-854-8748 (Phone)
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Hal J. Singer (Contact Author)

Econ One ( email )

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Suite 501
Washington, DC 20005
United States
202.312.3065 (Phone)

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