The Advising Investment Bank's Industry Expertise and Access to the Bidder's Private Information: Their Positive Influence on the Performance in Acquisition Sequences

Abstract

This study extents the literature of the advising bank’s positive influence on the performance in mergers and acquisitions by modeling the expertise of banks on the industry level while considering two levels of endogeneity. The first level of endogeneity is caused by the most experienced banks being selected into the largest and most complex transactions with the lowest returns. The second level of endogeneity is caused by the observability of the influence of the bank’s industry expertise on the performance only when the acquirer decided to employ a bank as advisor and to choose that bank in particular. Along the acquisition sequence the bank that is most familiar with the acquirer and that has the highest industry expertise in the acquirer’s and target’s industries is most likely to be chosen as advisor. The choice of the advising investment bank based on its industry expertise and its access to the acquirer’s private information has a positive influence on the acquirer’s returns. In the analysis of the alternative advisor choice by endogenous switching the employment of a more experienced bulge-bracket bank would have resulted in higher returns in transactions advised by non-bulge-bracket banks or that are unadvised. The analysis shows that the matching of the most experienced banks with the largest and most frequent serial acquirers in the most complex transactions is efficient in terms of higher returns and a higher completion probability.