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Information Production by Investment Banks: Evidence from Fairness Opinions

58 Pages Posted: 17 Mar 2007 Last revised: 15 May 2012

Matthew D. Cain

U.S. Securities and Exchange Commission

David J. Denis

University of Pittsburgh

Date Written: May 1, 2012

Abstract

We analyze a direct product of the investment banking process: target firm valuations disclosed in the fairness opinions of negotiated mergers. On average, acquirer advisors exhibit positive valuation errors that are significantly greater than those of target advisors. Top-tier advisors produce more accurate valuations than lower-tier advisors, but we find no relation between valuation accuracy and the contingency structure of advisory fees. The stock price reactions to merger announcements and to the public disclosure of target-sought fairness opinions are positively related to the difference between target firm valuations contained in the fairness opinion and the merger offer price. We conclude that investment banks produce information not previously available to market participants through the rendering of target-side fairness opinions.

Keywords: fairness opinions, investment banks, contingent fees, mergers, valuation

JEL Classification: G24, G34

Suggested Citation

Cain, Matthew D. and Denis, David J., Information Production by Investment Banks: Evidence from Fairness Opinions (May 1, 2012). AFA 2008 New Orleans Meetings Paper; Journal of Law and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=971069 or http://dx.doi.org/10.2139/ssrn.971069

Matthew D. Cain (Contact Author)

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
United States

David J. Denis

University of Pittsburgh ( email )

Katz Graduate School of Business
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)

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