Investment Banks in Dual Roles: Acquirer M&A Advisors as Underwriters

Abstract

We analyze the dual role of investment banks that provide advice to acquiring firms and act as underwriters on the securities issued to finance the acquisition. We find that a significant fraction (56 percent) of acquirers that issue public securities to finance their acquisitions also use their advisor as the underwriter on the acquisition related security issue. We find that this dual role of the acquirer advisor is associated with lower acquirer announcement returns, higher target announcement returns, and higher acquisition premiums. These results are consistent with the existence of conflict of interest between the acquiring firm shareholders and their dual role advisor. We also find that, for larger transactions, which have the most potential for conflict of interest because of the larger fees involved, the relation between acquirer announcement returns and the dual advisor-underwriter role played by the acquirer’s investment bank is more negative. Acquisitions that are advised by dual role investment banks are more likely to be eventually divested. For larger transactions, the relation between the likelihood of divestiture and the dual advisor-underwriter role played by the acquirer’s investment bank is more positive. However, such a dual role of the acquirer advisor does not lead to lower underwriting fees or issue costs. Acquisitions involving dual role investment banks are completed faster, suggesting a potential motivation for using investment banks in such dual advisor-underwriter roles. Our results are robust to controlling for the selection of firms that finance their acquisitions with a security issue and the endogeneity of underwriter selection.