IDEAS home Printed from https://ideas.repec.org/p/pur/prukra/1244.html
   My bibliography  Save this paper

Do Fairness Opinion Valuations Contain Useful Information?

Author

Listed:
  • Matthew D. Cain
  • David J. Denis

Abstract

We analyze target firm valuations disclosed in the fairness opinions of negotiated mergers between 1998 and 2005. On average, acquirer advisors exhibit a greater degree of valuation optimism than do target advisors. Top-tier advisors produce more accurate valuations than lower-tier advisors, but valuation accuracy is unrelated to the contingency structure of advisory fees. The stock price reactions to merger announcements and to the public disclosure of fairness opinions are positively related to the difference between target firm valuations contained in the fairness opinion and the merger offer price. We conclude that fairness opinions contain information not previously available to market participants.

Suggested Citation

  • Matthew D. Cain & David J. Denis, 2010. "Do Fairness Opinion Valuations Contain Useful Information?," Purdue University Economics Working Papers 1244, Purdue University, Department of Economics.
  • Handle: RePEc:pur:prukra:1244
    as

    Download full text from publisher

    File URL: https://business.purdue.edu/research/Working-papers-series/2010/1244.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
    2. Officer, Micah S., 2003. "Termination fees in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 69(3), pages 431-467, September.
    3. Kisgen, Darren J. & QJ Qian, Jun & Song, Weihong, 2009. "Are fairness opinions fair? The case of mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 91(2), pages 179-207, February.
    4. Malatesta, Paul H., 1983. "The wealth effect of merger activity and the objective functions of merging firms," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 155-181, April.
    5. Loughran, Tim & Vijh, Anand M, 1997. "Do Long-Term Shareholders Benefit from Corporate Acquisitions?," Journal of Finance, American Finance Association, vol. 52(5), pages 1765-1790, December.
    6. Charles W. Calomiris & Donna M. Hitscherich, 2005. "Banker Fees and Acquisition Premia for Targets in Cash Tender Offers: Challenges to the Popular Wisdom on Banker Conflicts," NBER Working Papers 11333, National Bureau of Economic Research, Inc.
    7. Raghavendra Rau, P., 2000. "Investment bank market share, contingent fee payments, and the performance of acquiring firms," Journal of Financial Economics, Elsevier, vol. 56(2), pages 293-324, May.
    8. Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-686.
    9. John C. Easterwood & Stacey R. Nutt, 1999. "Inefficiency in Analysts' Earnings Forecasts: Systematic Misreaction or Systematic Optimism?," Journal of Finance, American Finance Association, vol. 54(5), pages 1777-1797, October.
    10. Francis, J & Soffer, L, 1997. "The relative informativeness of analysts' stock recommendations and earnings forecast revisions," Journal of Accounting Research, Wiley Blackwell, vol. 35(2), pages 193-211.
    11. Moeller, Sara B. & Schlingemann, Frederik P. & Stulz, Rene M., 2004. "Firm size and the gains from acquisitions," Journal of Financial Economics, Elsevier, vol. 73(2), pages 201-228, August.
    12. Harford, Jarrad & Humphery-Jenner, Mark & Powell, Ronan, 2012. "The sources of value destruction in acquisitions by entrenched managers," Journal of Financial Economics, Elsevier, vol. 106(2), pages 247-261.
    13. Ronald W. Masulis & Cong Wang & Fei Xie, 2007. "Corporate Governance and Acquirer Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1851-1889, August.
    14. Baker, Malcolm & Coval, Joshua & Stein, Jeremy C., 2007. "Corporate financing decisions when investors take the path of least resistance," Journal of Financial Economics, Elsevier, vol. 84(2), pages 266-298, May.
    15. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    16. repec:bla:jfinan:v:59:y:2004:i:3:p:1083-1124 is not listed on IDEAS
    17. Charles W. Calomiris & Donna M. Hitscherich, 2007. "Banker Fees and Acquisition Premia for Targets in Cash Tender Offers: Challenges to the Popular Wisdom on Banker Conflicts," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 4(4), pages 909-938, December.
    18. Kathleen Fuller & Jeffry Netter & Mike Stegemoller, 2002. "What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions," Journal of Finance, American Finance Association, vol. 57(4), pages 1763-1793, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. La Mura, Pierfrancesco & Rapp, Marc Steffen & Schwetzler, Bernhard & Wilms, Andreas, 2011. "The certification hypothesis of fairness opinions for acquiring firms," International Review of Law and Economics, Elsevier, vol. 31(4), pages 240-248.
    2. Francesco Bavagnoli & Giangiacomo Buzzoni & Corrado Mandirola & Ernesto Salinelli, 2022. "Exploring market multiples accuracy for professional practices: sales is the value anchor but profitability and location matter too," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 26(4), pages 1409-1442, December.
    3. Daniel Wangerin, 2019. "M&A Due Diligence, Post‐Acquisition Performance, and Financial Reporting for Business Combinations†," Contemporary Accounting Research, John Wiley & Sons, vol. 36(4), pages 2344-2378, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Matthew D. Cain & David J. Denis, 2013. "Information Production by Investment Banks: Evidence from Fairness Opinions," Journal of Law and Economics, University of Chicago Press, vol. 56(1), pages 245-280.
    2. Andrey Golubov & Dimitris Petmezas & Nickolaos G. Travlos, 2013. "Empirical mergers and acquisitions research: a review of methods, evidence and managerial implications," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 12, pages 287-313, Edward Elgar Publishing.
    3. Renneboog, Luc & Vansteenkiste, Cara, 2019. "Failure and success in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 650-699.
    4. Cai, Ye & Sevilir, Merih, 2012. "Board connections and M&A transactions," Journal of Financial Economics, Elsevier, vol. 103(2), pages 327-349.
    5. Mario Fischer, 2015. "Challenging the payment effect in bank-financed takeovers," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(4), pages 347-376, October.
    6. Abhay Abhyankar & Keng-Yu Ho & Huainan Zhao, 2005. "Long-run post-merger stock performance of UK acquiring firms: a stochastic dominance perspective," Applied Financial Economics, Taylor & Francis Journals, vol. 15(10), pages 679-690.
    7. Paul A. Gompers & Yuhai Xuan, 2012. "The Role of Venture Capitalists in the Acquisition of Private Companies," Chapters, in: James R. Barth & Chen Lin & Clas Wihlborg (ed.), Research Handbook on International Banking and Governance, chapter 28, Edward Elgar Publishing.
    8. Kanungo, Rama Prasad, 2021. "Uncertainty of M&As under asymmetric estimation," Journal of Business Research, Elsevier, vol. 122(C), pages 774-793.
    9. Krishnan, C.N.V. & Masulis, Ronald W. & Thomas, Randall S. & Thompson, Robert B., 2012. "Shareholder litigation in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1248-1268.
    10. Humphery-Jenner, Mark L. & Powell, Ronan G., 2011. "Firm size, takeover profitability, and the effectiveness of the market for corporate control: Does the absence of anti-takeover provisions make a difference?," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 418-437, June.
    11. Hu, Nan & Li, Lu & Li, Hui & Wang, Xing, 2020. "Do mega-mergers create value? The acquisition experience and mega-deal outcomes," Journal of Empirical Finance, Elsevier, vol. 55(C), pages 119-142.
    12. Martynova, M. & Renneboog, L.D.R., 2005. "Takeover Waves : Triggers, Performance and Motives," Discussion Paper 2005-029, Tilburg University, Tilburg Law and Economic Center.
    13. Ouyang, Wenjing, 2015. "The effect of M&A advisors’ opinions on acquirer shareholder voting," The Quarterly Review of Economics and Finance, Elsevier, vol. 57(C), pages 175-190.
    14. Sara B. Moeller & Frederik P. Schlingemann & René M. Stulz, 2005. "Wealth Destruction on a Massive Scale? A Study of Acquiring‐Firm Returns in the Recent Merger Wave," Journal of Finance, American Finance Association, vol. 60(2), pages 757-782, April.
    15. Petmezas, Dimitris, 2009. "What drives acquisitions?: Market valuations and bidder performance," Journal of Multinational Financial Management, Elsevier, vol. 19(1), pages 54-74, February.
    16. Martynova, Marina & Renneboog, Luc, 2008. "A century of corporate takeovers: What have we learned and where do we stand?," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2148-2177, October.
    17. Ahern, Kenneth R., 2012. "Bargaining power and industry dependence in mergers," Journal of Financial Economics, Elsevier, vol. 103(3), pages 530-550.
    18. Martynova, M., 2006. "The market for corporate control and corporate governance regulation in Europe," Other publications TiSEM 8651e281-4914-41f2-ac14-1, Tilburg University, School of Economics and Management.
    19. Szu-Yin (Jennifer) Wu & Kee H. Chung, 2022. "Hedge Fund Activism and Corporate M&A Decisions," Management Science, INFORMS, vol. 68(2), pages 1378-1403, February.
    20. Fischer, Mario, 2017. "The source of financing in mergers and acquisitions," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 227-239.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pur:prukra:1244. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Business PHD (email available below). General contact details of provider: https://edirc.repec.org/data/kspurus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.