Do Investment Banks Matter for M&A Returns?

Review of Financial Studies, Vol. 24, No. 7, pp. 2286-2315, July 2011

EFA 2007 Ljubljana Meetings Paper

41 Pages Posted: 21 Dec 2006 Last revised: 7 Dec 2011

Jack Bao

Board of Governors of the Federal Reserve System

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Date Written: December 20, 2010

Abstract

We document a significant investment bank fixed effect in the announcement returns of an M&A deal. The inter-quartile range of bank fixed effects is 1.26%, compared to a full-sample average return of 0.72%. The results remain significant after controlling for the component of returns attributable to the acquirer. Our findings suggest that investment banks matter for M&A outcomes, and contrast earlier studies which show no positive link between various measures of advisor quality and M&A returns. Differences in average returns across banks are also persistent over time and predictable from prior performance. Clients do not chase past returns, which may explain why persistence exists in M&A performance while it is absent in mutual funds.

Keywords: Investment Banking, Persistence, Mergers & Acquisitions

JEL Classification: G24, G34

Suggested Citation

Bao, Jack and Edmans, Alex, Do Investment Banks Matter for M&A Returns? (December 20, 2010). Review of Financial Studies, Vol. 24, No. 7, pp. 2286-2315, July 2011; EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=952935

Jack Bao

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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