Do Investment Banks Matter for M&A Returns?

Abstract

W e document a significant investment bank fixed effect in the announcement returns of M&A deals. The interquartile range of bank fixed effects is 1.26%, compared with a fullsample average return of 0.72%. The results remain significant after controlling for the component of returns attributable to the acquirer. Our findings suggest that investment banks matter for M&A outcomes, and contrast earlier studies that show no positive link between various measures of advisor quality and M&A returns. Differences in average returns across banks are also persistent over time and predictable from prior performance. Clients do not chase past returns, which may explain why persistence exists in M&A performance while it is absent in mutual funds. (JEL G24, G34) Mer gers and acquisitions (M&A) are among the most critical decisions a CEO can make. Successful mergers can create substantial synergies, while misguided acquisitions can lead to misallocation of companies to parents unable to reap their full potential. In addition to these large effects on shareholder value, a bad acquisition also increases the CEO’s risk of being fired ( Lehn and Zhao 2006). A prominent example is the departure of Carly Fiorina from Hewlett Packard, which was widely attributed to her acquisition of Compaq. The quality of M&A transactions is also of great importance to the economy as a whole. The total value of M&A announced by a U.S. acquirer in 2007 was $2.1 trillion, around 15% of GDP.