The Role of Bank Advisors in Mergers and Acquisitions

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.