Working Paper: CEPR ID: DP6953
Authors: Andriy Bodnaruk; Massimo Massa; Andrei Simonov
Abstract: We study holdings in M&A targets by financial conglomerates which affiliated investment banks advise the bidders. We show that advisors take positions in the targets before M&A announcements. These stakes are positively related to the probability of observing the bid and to the target premium. We argue that this can be explained in terms of advisors, privy to important information about the deal, investing in the target in the expectation of its price to increase. We document the high profits of this strategy. We also document a positive relationship between the advisory stake and the deal characteristics. The advisory stake is positively related to the likelihood of deal completion and to the termination fees. However, these deals are not wealth-creating: there is a negative relation between the advisory stake and the viability of the deal. These results provide new insights into the conflicts of interest affecting financial intermediaries simultaneously advising on deals and investing in equities.
Keywords: insider trading; mergers and acquisitions; risk arbitrage
JEL Codes: G23; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Advisory banks' stakes (G28) | Probability of firm becoming a target (L21) |
| Advisory banks' stakes (G28) | Target premium (L21) |
| Advisory banks' stakes (G28) | Likelihood of deal completion (L14) |
| Advisory banks' stakes (G28) | Presence of termination fees (G19) |
| Advisory banks' stakes (G28) | Post-merger profitability (ROE, net profit margin) (L25) |