Is Paying Premium for a Top Bank Worth It?
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This paper investigates the relationship between the reputation of investment banking firms, who serve as advisors to companies, and mergers & acquisitions (M&A) announcement returns. I utilize event study methodology to measure cumulative abnormal returns (CARs) in each transaction to investigate whether the bargaining hypothesis or better deal hypothesis better explains the abnormal returns found in M&A deals. The results seem to support the better deal hypothesis. When targets are advised by top advisors, acquirer CARs are positively impacted. There is a positive relationship between both parties choosing top-tier advisors and acquirer CARs. Ultimately, there appears to be an interactive effect where the combination of acquirer-target choice of top-tier advisors impacts acquirer returns and both parties' shares of combined wealth gains. Finally, there is support for transaction sizes affecting the relationship between acquirer choice of top-tier advisors and their returns, with the positive impact on CARs from acquirers hiring top advisors more significant for smaller transactions.
From the Paper:"Mergers and acquisitions (M&A) has played a major role in corporate finance and development. Though M&A has been in existence since the formation of the first corporations, it started to increase drastically in the late 19th century with the first merger wave. To this day, many companies believe that M&A is essential for growth, as it provides companies with new products, customer segments, and markets without the need to establish a completely new business. Companies undertake M&A transactions in order to realize cost savings and greater growth, which can occur because of better economies of scale or a faster-growth target company, respectively.
"M&A transactions are not only important to individual businesses, but also are important from a macroeconomic standpoint: every year, companies spend over $2 trillion on M&A transactions (Gould 2015), and according to the World Bank, U.S. GDP in 2013 was approximately $16 trillion, so M&A comprised of 12.5% of GDP. Therefore, it is important to investigate whether such transactions are worthwhile, especially for executives of public companies as they make transaction decisions on behalf of all shareholders.
"Studies have examined the abnormal returns that are usually associated with M&A transactions. Most of such studies focus on characteristics of the transactions or companies involved and often overlook the roles of their investment banking advisors. In fact, a major part of M&A expenses are investment banking advisory fees. In 2013, more than 85% of M&A transactions involved investment banking advisors that were paid almost $40 billion in advisory fees (Mergerstat 2013). The amount spent on advisory fees suggests that corporations believe investment banking advisors play important and beneficial roles in the M&A process. Indeed, most firms are not completely familiar with the complexities involved in the process, so investment banks do provide valuable support. Nonetheless, the different tiers of banks and fees charged suggests that advisors actually impact transaction results and are not solely executional. This paper analyzes how both the type and number of investment banking advisors affect target and acquirer returns for M&A transactions."
Cite this Research Paper:
Is Paying Premium for a Top Bank Worth It? (2015, May 26) Retrieved January 23, 2021, from https://www.academon.com/research-paper/is-paying-premium-for-a-top-bank-worth-it-154198/
"Is Paying Premium for a Top Bank Worth It?" 26 May 2015. Web. 23 January. 2021. <https://www.academon.com/research-paper/is-paying-premium-for-a-top-bank-worth-it-154198/>