Comparative Advantage, Industry Specialization, and the Role of Investment Banks in M&As

Abstract

This paper examines the value added role of industry specialist advisors in M&A transactions using the Additive Revealed Comparative Advantage (ARCA) index to proxy advisors’ relative level of industry specialization prior to deal announcement. After controlling for endogeneity, we find that industry specialist advisors are able to generate higher returns for their acquirer clients, with the value creation resulting primarily from the selection of more synergistic targets and negotiating to pay a lower takeover premium. Additionally, while our results suggest specialist advisors are less likely to complete a deal, they are able to complete tender offers in less time. The findings are consistent with the traditional perception of the superiority of industry specialists and show that specialization is beneficial to the M&A advisory market. We find that specialist advisor charge lower fees, suggesting that in addition to superior advice, they are able to pass some cost efficiencies onto their bidder clients.