Dual role advisors and conflicts of interest

Abstract

A dual role advisor is an investment bank that is advising the vendor client in an M&A transaction while simultaneously financing the bidder. I investigate whether dual role advising is good or bad for target shareholders through a comprehensive analysis of U.S. public M&A over the 15-year period from 1993 to 2008. Conflicts of interest are manifested through that deals which involve a dual role advisor are, compared to deals with no dual role advisors; (a) performed at lower premium, (b) more likely to be subject to a lawsuit, (c) feature lower merger advisor fees and (d) commensurate with higher announcement returns for bidders. Target firms with sound corporate governance practices are less likely to encounter dual role situations.