Investment banking, the certification effect and M&A deals: An event study approach

Abstract

Several studies have found the existence of a relationship between the role of investment banks appointed as advisors in M&A deals and the yields earned by their clients. Traditionally this relationship is fostered by the ability of the leading investment banks to arrange and structure the best deals – i.e. the Superior Deal Hypothesis – and by the “certification effect”, namely that their presence provides assurance to the capital markets where are traded the companies involved– i.e. the Certification Effect. Our study also investigates the strength and direction of this relationship before and after Lehman Brothers collapse. The analysis, which uses an original composite metric in order to measure the reputation variable, is focused on the transactions that took place between listed companies in two time frames specifically pre and post the Lehman Brothers bankruptcy. The total sample is composed of 229 transactions, divided into 161 and 68 observations, pre and post Lehman respectively. The analysis conducted allows us to separate the Superior Deal Hypothesis from Certification Effect. On evidence, after the Lehman default, the wealth of shareholders involved (both relating to the targets and acquirers) is significantly influenced by the reputation of the investment banks which acted as advisors. Conversely, before the start of the financial turmoil in September 2008, no significant evidence has been found. The analysis conducted suggests that subsequent to the Lehman Brothers collapse, the certification effect has been playing a crucial role in shareholders’ choice.