RFS Advance Access published online on June 8, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp043
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Investment Banks as Insiders and the Market for Corporate Control
Mendoza College of Business, University of Notre Dame
INSEAD and CEPR
Eli Broad Graduate School of Management, Michigan State University, SITE, and CEPR
Send correspondence to Massimo Massa, INSEAD, Boulevard de Constance, 77300 Fontainebleau, France; telephone: 33-160724481; fax: 33-160724045. E-mail: massimo.massa{at}insead.edu.
JEL Classification: G23, G32, G34
 |
Abstract |
|---|
We study holdings in merger and acquisition (M&A) targets by financial conglomerates in 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 who are privy to important information about the deal, investing in the target in the expectation of its price increasing. We document the high profits of this strategy. 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.
We thank two anonymous referees and the editor, Michael Weisbach, for very helpful comments. We also benefited from the comments of Malcolm Baker, Doug Diamond, Eugene Kandel, Jonathan Macey, Jay Ritter, David Yermak, seminar participants at University of California–Davis, Michigan State University, NHH, University of Florida, University of Amsterdam, NES, HSE, HEC Toulouse, Temple University, Virginia Tech, Rutgers University, University of Colorado, Rochester University, University of Notre Dame, University of Washington, Arizona State University, and participants at the 2007 European Finance Association Meeting, the European Summer Symposium in Financial Markets in Gerzensee 2007, and the American Finance Association Meeting 2008. Andriy Bodnaruk and Andrei Simonov were supported in part by the Jan Wallander and Tom Hedelius Foundation and Riksbankens Jubileumfond.