Fairness Opinions in Mergers and Acquisitions

Fisher College of Business Working Paper No. 2007-03-018

Charles A. Dice Center Working Paper No. 2007-11

43 Pages Posted: 22 Mar 2007  

Anil K. Makhija

Ohio State University (OSU) - Department of Finance

Rajesh P. Narayanan

Louisiana State University

Multiple version iconThere are 2 versions of this paper

Date Written: October 2007

Abstract

Fairness opinions provided by investment banks advising on mergers and acquisitions have been criticized for being conflicted in aiding bankers further their goal of completing the deal as opposed to aiding boards (and shareholders) by providing an honest appraisal of deal value. We find empirical support for this criticism. We find that shareholders on both sides of the deal, aware of the conflict of interest facing advisors, rationally discount deals where advisors provide fairness opinions. The reputation of the advisor serves to mitigate this discount, while the contingent nature of advisory fees appears to have no impact. Furthermore, consistent with the criticism of fairness opinions, we find evidence suggesting that fairness opinions are sought by boards for the legal cover they provide against shareholders unhappy with the deal's terms. Thus, altogether our findings suggest that investment bankers and boards may be complicit in using fairness opinions to further their own interests at an expense to shareholders.

Keywords: Fairness Opinions, Mergers and Acquisitions, Investment Banking

JEL Classification: G34, G24

Suggested Citation

Makhija, Anil K. and Narayanan, Rajesh P., Fairness Opinions in Mergers and Acquisitions (October 2007). Fisher College of Business Working Paper No. 2007-03-018; Charles A. Dice Center Working Paper No. 2007-11. Available at SSRN: https://ssrn.com/abstract=972138 or http://dx.doi.org/10.2139/ssrn.972138

Anil K. Makhija (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-1899 (Phone)

Rajesh P. Narayanan

Louisiana State University ( email )

Baton Rouge, LA 70803-6308
United States
225-578-6236 (Phone)

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