The Role of Bank Advisors in Mergers and Acquisitions

By Allen, Linda; Jagtiani, Julapa et al. | Journal of Money, Credit & Banking, April 2004 | Go to article overview
Save to active project

The Role of Bank Advisors in Mergers and Acquisitions


Allen, Linda, Jagtiani, Julapa, Peristiani, Stavros, Saunders, Anthony, Journal of Money, Credit & Banking


This paper looks at the role of commercial banks and investment banks as financial advisors. In their role as lenders and advisors, banks can be viewed as serving a certification function. However, banks acting as both lenders and advisors face a potential conflict of interest that may mitigate or offset any certification effect. Overall, we find evidence of a net certification effect for target firms but conflicts of interest for acquirers. In particular, target firms earn higher abnormal returns when the target's own bank is hired as merger advisor, consistent with the bank's role as certifier of the (more informationally opaque) target's value to the acquirer. In contrast, we find no net certification role for acquirers. There are at least two possible reasons for this. First, certification of value may be less important for acquirers because it is the target firm that must be priced in a merger. Second, acquirers may utilize commercial bank advisors in order to obtain access to bank loans to finance activities in the postmerger period. Thus, an acquirer may choose its own bank (with whom it has had a prior lending relationship) as an advisor in a merger. However, this choice weakens the certification effect and creates a potential conflict of interest because the advisor's merger advice may be distorted by considerations related to the bank's past and future lending activity.

JEL code: G21

Keywords: relationship banking, investment bank advisors, certification effect, conflict of interest effect, mergers, acquisitions.

**********

FINANCIAL INTERMEDIARIES are specialists in information production and processing. As advisors to both targets and acquirers, financial institutions utilize their information gathering expertise to ascertain the reservation price of the merger counterparty, the potential for synergistic gains, as well as the risks of the transaction.

Commercial banks may be well positioned to offer advisory services if they have established lending and other customer relationships with either party to a merger. During the course of a long-term customer relationship, a commercial bank obtains private information about a firm's cash flows, financial resources, and other exposures that can be useful in estimating the future prospects of a proposed merger. Indeed, if the role of the financial advisor in a merger is to provide information, then commercial banks, especially those with prior lending relationships, potentially have a comparative advantage over investment banks in advising their customers--particularly since, until very recently, investment banks did not make commercial loans. (1) The banking literature (see Chan, Greenbaum, and Thakor 1986, for example) suggests that information generated in the course of a lending relationship may be reusable and therefore transferable. This transfer is feasible because while SEC regulations and the U.S. bankruptcy code prohibit the transfer of information from an investment bank subsidiary to a related commercial bank subsidiary, there are no restrictions on the reuse of information obtained in the course of a standard lending relationship (e.g., on information flows from the bank's lending department to the investment bank). (2)

Following a parallel literature dealing with underwriting activities, we refer to a bank's ability to obtain private information about a customer and to use this information in supplying services such as merger advice to the customer as the certification effect. (3) Investment banks may also be privy to private information obtained, for example, in the course of underwriting activities. However, underwriting episodes are discrete and intermittent, corresponding to the relatively short time period surrounding the issue registration, offering period, and after-market support period. In contrast, commercial bank lending and other relationships are often long standing and continuous, requiring the ongoing monitoring of the firm's activities.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

The Role of Bank Advisors in Mergers and Acquisitions
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?