Fairness Opinions Research Articles

The Perverse Effects of Investment Bank Rankings: Evidence from M&A League Tables

This paper explores how league tables, which are rankings based on market shares, influence the M&A market. A bank’s league table rank predicts its future deal flow, above and beyond other determinants of this future deal flow. This creates incentives for banks to manage their league table ranks. League table management tools include selling fairness opinions and reducing fees. Banks use such tools mostly when their incentives to do so are high: when a transaction affects their league table position or when they lost ranks in recent league tables. League table management seems to affect the quality of M&A transactions.

REFORMASI MANAJEMEN KEUANGAN SEKTOR PUBLIK

The financial management area since enactment of the Act OtonomiDaerah, still very far from expectations. Implementation of regional financial governance still needs to be reformed, so that the financial management area runs out transparent, accountable and accountable. Local financial management sourced from local fiscal management, still reflect a discrepancy with what has been underlined in the rule of law. This can be seen from the results of audits by BPK to local finance, which in terms of which are still very many areas that get a fair opinion with the exception that not even a little disclaimer. This also happens in some urban districts in South Sulawesi.

Comprehensive Study of the Stock Market’s Reaction to Fairness Opinions

The authors comprehensively study the stock market’s reaction to buy-side fairness opinions (FO) and investigate investment strategies associated with such opinions. They find that the stock portfolio of acquiring firms that purchase an FO for their merger deals has negative risk-adjusted abnormal returns and performs poorly relative to acquiring firms that undertake similar deals but do not use an FO. These results imply that for investment professionals, a more appropriate investment strategy is mostly to short the opinioned stocks.

The certification hypothesis of fairness opinions for acquiring firms

Abstract We study the certification role of fairness opinions in corporate transactions in a simple non-cooperative setting with asymmetric information and possibly misaligned managerial incentives, and discuss the effect of different regulatory scenarios. Specifically, we compare three settings: one in which no third-party fairness opinion is available, one in which the management is required to obtain a fairness opinion before any transaction, and one in which the management’s decision to require a fairness opinion is voluntary. We compare shareholder value in each of the three scenarios and discuss implications for the optimal design of regulatory environments for fairness opinions.

A More Critical Use of Fairness Opinions as a Practical Approach to the Behavioral Economics of Mergers and Acquisitions

This paper responds to Professor Donald C. Langevoort's essay entitled Behavioral Economics of Mergers and Acquisitions (12 Transactions: Tenn. J. Bus. L. 65 (2011)). Together with Professor Langevoort's essay and another responsive work written from the standpoint of behavioral psychology – Eric Sundstrom's Tall Steps, Slippery Slopes & Learning Curves in the Behavioral Economics of Mergers & Acquisitions (12 Transactions: Tenn. J. Bus. L. 65 (2011)) – this paper preliminarily explores solutions to behavioral issues in the context of mergers and acquisitions. Specifically, this paper contends that changes in the contents, construction, use, and assessment of fairness opinions may better enable fairness opinions to counteract the potential and actual biases of corporate management and shareholders in M&A decision-making. The paper begins by briefly reviewing the nature (attributes, benefits and detriments), regulation, and utilization of fairness opinions in the M&A transactional process, including the ways in which fairness opinions manifest, support, and attempt to counteract behavioral norms. Next, the paper suggests best practices in the construction and use of fairness opinions that take into account our knowledge of behavioral psychology as it relates to M&A transactions. The net effect of these best practices is to transform what may be unconscious behavioral norms into conscious biases that, once exposed, can be confronted and, as desired, mitigated.

Spillover on Alliances - Joint Venture of Siemens-Nokia to the Synergy of AT&T-T-Mobile

In venture of developing corporate growth strategy and business plan, alliances help clients identify and implement joint ventures, and alliance structures to achieve the benefits of working with a complementary partner. This paper uses fairness opinions to assess the synergy for the recent mergers between AT&T and T-Mobile, and to learn from the spillover effects to fulfill their fiduciary duties by providing independent financial analysis for shareholders, board of directors, trustees, and others.

Fairness Opinions in Mergers and Acquisitions

When evaluating a merger or acquisition proposal, boards frequently seek fairness opinions from their financial advisors. This fairness opinion ratifies the consideration being paid or received as fair from a financial point of view to shareholders. This chapter (Chapter 26 in The Art of Capital Restructuring: Creating Shareholder Value through Mergers and Acquisitions, Baker and Kiymaz (eds.),Wiley 2011) describes how a Delaware Supreme Court ruling and Delaware corporate law combined to institutionalize fairness opinions and how the form and content of a fairness opinion results from concerns over limiting the liability associated with delivering the opinion. It then surveys the limited finance literature that examines whether fairness opinions provide value to shareholders or serve the interests of the board and management at the expense of shareholders. It also highlights the difficulties associated with conducting such empirical tests because of the way fairness opinions are sought and provided. It concludes with some conjectures about the potential value of fairness opinions, and raises questions for future research.

The Use of Independent Fairness Opinions and the Performance of Acquiring Firms

A fairness opinion (FO) in a merger or an acquisition transaction is a report issued by an investment banker to certify the transaction price. The banker issuing the FO can be independent by providing only an FO and receiving a fixed fee. Alternatively, the banker can be nonindependent by also providing advisory services and hence also receiving a contingent fee. I investigate the effect of the acquirers' use of independent FOs and the contingent fees paid to the acquirers' issuing bankers on the acquirers' announcement returns and postannouncement returns and operating performance. I find that around a merger announcement, an acquirer with an independent FO earns a higher abnormal return than an acquirer with a nonindependent FO. In addition, the contingent fee charged by an acquirer's banker that issues an FO is found to be negatively associated with the same return. Moreover, the postbid abnormal return for an acquirer with an independent FO is higher than that for an acquirer with a nonindependent FO up to six months following a merger announcement. Furthermore, I find a negative relation between the contingent fee charged by an acquirer's issuing banker and the postannouncement operating performance of an acquirer. Overall, these results support the claim that the use of an independent FO plays an effective corporate governance role for an acquirer. These results are also consistent with the view that a higher contingent fee paid to the acquirer's banker that provides an FO intensifies the conflict of interest faced by the banker.

Re-examination of a true and fair view opinion in the midst of pecuniary crisis for investment decision-making

This paper is set out to examine the use of a true and fair opinion in audit reports with a view to proposing an alternative phrase that would limit the auditors‟ liability on the audit, and create confidence for investment decision-making. The views of accountants and business administrators in academics and practice; and the public within the academic environment represented the sample used as respondents for primary data collection. Data collected were analyzed using statistical tools like simple percentages and Kendalls measure of concordance. Amongst others, it was found that a majority of the respondents are of the opinion that a shift from the popular „a true and fair view‟ opinion would create more credibility on the audit function, and decision making. The researcher advocates an alternative phrase that would reflect the independent auditors‟ actual role in the financial audit along with standardized transparency rating-similar to the credit rating given to bonds, to enhance the integrity of the auditor, and dependability of prospective investor.Keywords: Published report; true and fair; expectation gap; independent auditor; value.

Boards, Uncertainty, and the Use of Fairness Opinions

Manuscript Type: Empirical Research Question/Issue: We propose and test a new perspective on why the boards of some acquiring firms purchase a fairness opinion (FO). Specifically, we examine whether the board's knowledge explains the use of an FO and the market reaction to the FO. Research Findings/Insights: We find that FOs are more likely to be purchased when the acquiring firm's board feels uncertain about the deal. Specifically, we find that boards with more outside directors are more likely to use an FO, while boards whose directors hold more outside appointments (busy boards) are less likely to seek an FO. Moreover, we find that although the market reacts negatively to the FO, board characteristics both moderate and exacerbate the reaction. When an FO is used by a busy board, the market reacts more negatively to the merger announcement. In contrast, board independence and the average service years for directors seem to moderate the market's reaction to the FO. Theoretical/Academic Implications: The results of this study are consistent with the idea that a lack of knowledge and underlying transaction uncertainty motivates the board to purchase an FO. In addition, our empirical evidence supports a sophisticated market reaction, where the market recognizes the board's knowledge when assessing the necessity of the FO. Practitioner/Policy Implications: This study provides a new perspective on why boards use FOs. A board with more outside directors may be strong on monitoring, but may lack knowledge on the deal. This essentially provides an example of a cost associated with an independent board. Further, we show that the market can differentiate the types of boards that use an FO.

Some Aspects Regarding the Role of Fair Value Accounting During the Current Financial Crisis

The financial crisis that hit the American economy to its heart in September 2008, rapidly spreading all around the world, has generated strong debates on the use of exotic derivatives financial instruments and of fair value accounting. These themes that made front-page news all over again raised divergent opinions among bankers, insurance executives, auditors or politicians more or less affected by the crisis. This paper aims at reviewing the situation of financial markets, identifying the role and importance of fair value accounting and derivatives within these huge scandals, presenting both for and against fair value and credit derivatives opinions and giving some anti-crisis solutions for the future.

The Certification Hypothesis of Fairness Opinions for Acquiring Firms

We study the certification role of fairness opinions in corporate transactions in a simple non-cooperative setting with asymmetric information and possibly misaligned managerial incentives, and discuss the effect of different regulatory scenarios. Specifically, we compare three settings: one in which no third-party fairness opinion is available, one in which the management is required to obtain a fairness opinion before any transaction, and one in which the management's decision to require a fairness opinion is voluntary. We compare shareholder value in each of the three scenarios and discuss implications for the optimal design of regulatory environments for fairness opinions.

Inco Ltd.: Market Value, Fair Value, and Management Discretion

ABSTRACTWe examine management discretion to decide when and how much to write down an asset, in a unique case where a tracking stock provides an observable market value for the asset. We find that, despite market evidence that Inco Ltd.'s financial statements substantially overvalued the Voisey's Bay nickel mine throughout 1997 to 2000, management chose not to write down the mine until 2002. Inco management used an independent fairness opinion to justify its December 2000 redemption of the tracking stock at 25% of its initial value, indicating almost surely that Inco management was aware of the generally accepted accounting principles (GAAP) impairment. This case illustrates that GAAP's reliance on undiscounted cash flows for impairment decisions allows huge unrecorded disparities between book and market value. The management discretion exercised in this case provides a concrete example of the subjectivity inherent in fair valuation.

Boards, Uncertainty, and the Use of Fairness Opinions

Manuscript Type: Empirical Research Question/Issue: We propose and test a new perspective on why the boards of some acquiring firms purchase a fairness opinion (FO). Specifically, we examine whether the board’s knowledge explains the use of a FO and the market reaction to the FO. Research Findings/Insights: We find that FOs are more likely to be purchased when the acquiring firm’s board feels uncertain about the deal Specifically, we find that boards with more outside directors are more likely to use a FO, while boards whose directors hold more outside appointments (busy boards) are less likely to seek a FO. Moreover, we find that although the market reacts negatively to the FO, board characteristics both moderate and exacerbate the reaction. When a FO is used by a busy board, the market reacts more negatively to the merger announcement. In contrast, board independence and the average service years for directors seem to moderate the market’s reaction to the FO. Theoretical/Academic Implications: The results of this study are consistent with the idea that a lack of knowledge and underlying transaction uncertainty motivates the board to purchase a FO. In addition, our empirical evidence supports a sophisticated market reaction, where the market recognizes the board’s knowledge when assessing the necessity of the FO.Practitioner/Policy Implications: This study provides a new perspective on why boards use FOs. A board with more outside directors may be strong on monitoring, but may lack knowledge on the deal. This essentially provides an example of a cost associated with an independent board. Further, we show that the market can differentiate the types of board that use a FO.

Fairness Opinions and Capital Markets: Evidence from Germany, Switzerland and Austria

This paper provides the first empirical evidence of fairness opinions in Europe. Legal requirements concerning the use of fairness opinions in mergers and acquisitions are significantly different in Germany, Switzerland and Austria. We examine the determinants of fairness opinions for target firms in these various regulatory settings, and moreover, investigate the impact of such opinions on the abnormal returns of target firms. While in Germany and Austria market participants do not deem fairness opinions important, they do create value for shareholders in Switzerland. Because conflicts of interest between the target’s board and bidder are a main determinant of fairness opinions in Switzerland, we conclude that when the target’s management faces such conflict, external expert advice replaces the board’s opinion on the offer.

Are fairness opinions fair? The case of mergers and acquisitions

Over the period 1994–2003, 80% of targets and 37% of acquirers obtain a third-party assessment of the fairness of a merger or acquisition. These fairness opinions do not affect deal outcomes when used by targets, but they affect deal outcomes when used by acquirers. The deal premium is lower in transactions if the acquirer obtains a fairness opinion, and is further reduced if multiple advisors provide an opinion. However, the acquirer's announcement-period return is 2.3% lower if the acquirer has a fairness opinion, especially if the acquirer pays a high premium, indicating that investors are skeptical of these transactions.

Does Legally Mandated Independence of Advisers Improve Merger Outcomes for Shareholders?

We obtain data from SEC filings and SDC for 589 mergers and acquisitions in the U.S. for announced between 1998 and 2005 for which we are able to determine the numbers and identities of all parties acting as financial advisers and providing fairness opinions regarding the transaction to the target and acquiring firms. We develop measures of the degree of moral hazard to which the firms may have been subject based on the numbers of advisers fulfilling the roles of financial adviser and fairness opinion provider in each case. We then use these measures in multiple regression models of post-acquisition firm performance to test the hypothesis that performance is negatively related to moral hazard, as Sarbanes-Oxley (SOX) has implicitly assumed. We find a significant, negative relation between both the level of moral hazard and the degree of moral hazard and acquiring firm abnormal returns on the announcement of the acquisitions. However, our preliminary findings indicate that moral hazard may not have influenced outcomes differentially following implementation of SOX.

Fairness Opinions and Capital Markets: Evidence from Germany, Switzerland and Austria

In this paper, we provide the first empirical evidence of fairness opinions in Europe. Legal requirements concerning the use of fairness opinions in mergers and acquisitions are significantly different in Germany, Switzerland, and Austria. We examine the determinants of target fairness opinions in these various regulatory settings and, moreover, investigate the impact of such opinions on abnormal target returns. Whilst in Germany and Austria market participants do not deem fairness opinions important, they do create value for shareholders in Switzerland. Because conflicts of interest between target board and bidder are a main determinant of fairness opinions in Switzerland, we conclude that, when target management faces such conflict, external expert advice replaces the board's opinion on the offer.

Summary of selected FINRA Regulatory Notices and Disciplinary Actions

PurposeThe purpose of this summary is to provide excerpts of selected Financial Industry Regulatory Authority (FINRA) Regulatory Notices issued from October to December 2007 and a sample of disciplinary actions during that period. In July 2007, FINRA Regulatory Notices replaced NASD Notices to Members.Design/methodology/approachProvides excerpts from FINRA Reg Notice 07‐54, Fairness Opinions; Reg Notice 07‐57, Representation of Parties in Arbitration and Mediation; Reg Notice 07‐59, Supervision of Electronic Communications; Reg Notice 07‐61, Trade Reporting and Compliance Engine (TRACE), and Reg Notice 07‐65, Amendments to NYSE Rule 409(f).FindingsThe paper finds useful information in each of these Notices.Originality/valueThese are direct excerpts designed to provide a useful digest for the reader and an indication of regulatory trends. The FINRA staff is aware of this summary but has neither reviewed nor edited it. For further detail and FINRA contacts for each notice, as well as other notices and useful information, the reader is directed to www.finra.org

The Fairness Opinion Puzzle: Board Incentives, Information Asymmetry, and Bidding Strategy

Abstract The proliferation of fairness opinions promulgating “wide as Texas” price ranges is not only a seeming regulatory failure, it is a puzzle: why do 60 percent of target boards solicit seemingly worthless documents not required by law, while 40 percent of their peers do not? This article explains a fairness opinion as “cheap talk” between a board and public shareholders. In the Fairness Opinion Game, a board issues a fairness opinion to communicate with two shareholder generations: existing shareholders voting on the proposed sale of their shares and potential aftermarket buyers who would buy if the present transaction falls through. The game yields two equilibria: one where the board issues no opinions and one where Texas‐wide opinions emerge as equilibrium messages. We conclude that three factors determine a fairness opinion's width: the board’s private incentives, information asymmetry between the board and shareholders, and transaction costs incurred by aftermarket buyers.