The Value of Your IPO Advisor's Advice: An M&A Perspective

Abstract

This empirical paper addresses the issue of the quality of financial advice given by investment banks regarding firms’ acquisition activities. Motivated by anecdotal and documented evidence on the cases of ”fee generating” motives in advisory business, the hypothesis of the paper is whether the better established contacts of investment bankers with firm’s executives can boost the phenomenon of ”chasing deals” and lead to a larger number of value destroying acquisitions. We investigate whether closer contacts between investment bankers and corporate management established at IPO, lead the firm to perform acquisitions characterized with lower abnormal returns. In this paper, the conjecture is that those banks, who have underwritten company’s IPO issue, have preferential access to its corporate executives, in that the bankers can easily identify and pitch potential takeover targets deliberately and insistently. If the ”fee generating” hypothesis is true, we expect the abnormal returns at acquisitions to be lower for firms that went public with banks actively advising on M&As, and when the underwriter’s current M&A business is deteriorating. In contrast, whenever a firm goes public with an IPO-specialized bank, which does not seek fees from extra M&A advisory, we expect this firm to have higher announcement returns at acquisitions. This paper is the first to our knowledge that analyzes the misalignment of M&A advisory bankers, in a framework of relationship banking emerging during IPO underwriting. The results suggest that there is indeed a negative relation between the aspiration of the underwriter to do advisory business and firm’s stock performance at acquisitions. The results stay robust when controlling for possible endogeneity of strategic choice of the investment banker for IPO. ∗I am grateful to Michel Habib, Alexander Ljungqvist, Lucy White, Alex Edmans, Zsuzsanna Fluck and Gerzensee Doctoral Workshop participants for valuable comments and suggestions. Correspondence: Swiss Finance Institute, Plattenstr 32, 8032 Zurich T. +41 44 6343596 e-mail: plaksen@isb.uzh.ch