Investment Banks as Insiders and the Market for Corporate Control

48 Pages Posted: 1 Mar 2007 Last revised: 9 Jun 2008

Andriy Bodnaruk

University of Illinois at Chicago

Massimo Massa

INSEAD - Finance

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Gaidar Institute for Economic Policy; Centre for Economic Policy Research (CEPR); SITE

Multiple version iconThere are 3 versions of this paper

Date Written: December 2007

Abstract

We study holdings in M&A targets by financial conglomerates which affiliated investment banks advise the bidders. We show that advisors take positions in the targets before M&A announcements. These stakes are positively related to the probability of observing the bid and to the target premium. We argue that this can be explained in terms of advisors, privy to important information about the deal, investing in the target in the expectation of its price to increase. We document the high profits of this strategy. We also document a positive relationship between the advisory stake and the deal characteristics. The advisory stake is positively related to the likelihood of deal completion and to the termination fees. However, these deals are not wealth-creating: there is a negative relation between the advisory stake and the viability of the deal. These results provide new insights into the conflicts of interest affecting financial intermediaries simultaneously advising on deals and investing in equities.

Keywords: inside trading, risk arbitrage, mergers and acquisitions

JEL Classification: G34, G23, G32

Suggested Citation

Bodnaruk, Andriy and Massa, Massimo and Simonov, Andrei, Investment Banks as Insiders and the Market for Corporate Control (December 2007). EFA 2007 Ljubljana Meetings Paper; AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=966202 or http://dx.doi.org/10.2139/ssrn.966202

Andriy Bodnaruk

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Massimo Massa

INSEAD - Finance ( email )

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F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Andrei Simonov (Contact Author)

Michigan State University - Eli Broad Graduate School of Management ( email )

645 N. Shaw Lane, 321 Eppley Center
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.andreisimonov.com

Gaidar Institute for Economic Policy ( email )

3-5 Gazetny Lane
Moscow, 125009
Russia

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

SITE ( email )

P.O. Box 6501
S-113 83 Stockholm, 11383
Sweden

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