Abstract
AbstractThis paper examines the role of the social network hierarchy of financial advisory firms in a mergers and acquisitions (M&As) framework. Financial advisors are information intermediaries who play an information extraction and information dissemination role. The more central the advisory firm is within the network of advisory firms, the greater their access to information flows. Our findings indicate that more central advisors are associated with higher acquirer announcement abnormal returns, higher abnormal combined returns and higher operating long‐run performance for the new entity. Central advisors also mitigate information asymmetries, resulting in lower premium paid by bidders. In return, more central advisory firms demand higher advisory fees, engage in higher M&A activity and are more likely to advise large acquirers and acquisitions of large and public deals. Our results are robust to endogeneity and self‐selection concerns.
Highlights
There is a substantial and growing literature showing that personal and social connections matter in financial issues, such as corporate value and operating performance, policies and practices, corporate governance, investment policies and acquisition performance
We investigate the role of financial advisors within the mergers and acquisitions (M&As) framework from a different and new angle
Following Chemmanur and Fulghieri’s (1994) model of information asymmetry, we argue that advisors can alleviate asymmetries and we examine the impact of centrality on deal premiums
Summary
There is a substantial and growing literature showing that personal and social connections matter in financial issues, such as corporate value and operating performance, policies and practices, corporate governance, investment policies and acquisition performance. More central financial advisors are better positioned to extract information from their network about market and industry-wide dynamics, and to propose appropriate target firms that can create synergic gains for the bidders’ shareholders. A central position in a network enables advisors to have access to a greater number of market participants, and greater depth of knowledge of market and industry dynamics They are better equipped to identify and select target firms that could more efficiently leverage the resources and capabilities of the acquirer. More central financial advisors, who are better positioned to extract information from their network about market and industry-wide dynamics, are better able to match target firms with bidders in order to generate higher synergy gains. Relative deal size Public Private Cash deals Stock deals Diversifying deals Panel E: Bidder advisor characteristics
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