Abstract
We investigate whether top-tier advisors provide superior services by examining the relationship between reputation (measured by whether it is a top-10 advisor ranked on deal value) of financial advisors on the bidder side and stock market-based/accounting-based performance of bidders. Using Chinese listed companies with major assets reorganizations (MARs, M&As with large-scale target), we find top-tier advisors are associated with higher excess returns (CARs), implying that reputation generates a verification effect on investors. But we find no significant relationship between the advisor reputation and bidders’ accounting-based performance post-MARs. The findings indicate that although advisor reputation can attract M&A business and sends positive signal to the market, it does not lead to stronger financial performance in the long run. That is, the so-called top-tier financial advisors fail to live up to their reputation. We also find that payment premium is an intervening variable between advisor reputation and the long-term accounting-based performance of bidders, suggesting that top-tier advisors fail in their duties to help clients achieve greater share of synergy gains.
Highlights
After going through the phase of extensive growth, Chinese firms face many obstacles in continuous development, such as excess capacity and rising costs
Duties in due diligence, which is revealed by Chinese media3. These lead to our primary research questions: Does top-tier advisors lead to superior stock market-based performance? And are they behave as expected and generate strong accounting-based performance in the long run? Our results show that top-tier advisors are associated with better bidder4 CARs but not better long-term accounting-based performance of bidders, it is consistent with the notion that financial advisors do not live up to their reputation
We find that top-tier advisors are associated with higher payment premium, resulting in wealth being transferred from bidders to sellers
Summary
After going through the phase of extensive growth, Chinese firms face many obstacles in continuous development, such as excess capacity and rising costs. While the current literature has extensively discussed M&As in China, very few focuses on the role of financial advisors in enhancing firm performance during MARs. Top-tier advisors can send signals to the stock market that both the bidder firms and M&As are of high quality, and top-tier advisors are more capable of selecting more premium targets and offering constructive advice. Our results show that top-tier advisors are associated with better bidder CARs but not better long-term accounting-based performance of bidders, it is consistent with the notion that financial advisors do not live up to their reputation. With the current M&A trend, many studies have investigated M&As in China’s market These studies ignore one crucial factor in enhancing M&A synergy, that is, the role of financial advisors in facilitating M&A process.
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