Value of Your IPO Advisor's Advice: M&A Perspective

Abstract

This paper addresses the role of financial advisors in firms' acquisition activities. Motivated by anecdotal and documented evidence on the cases of fee generating motives in advisory business, we test whether the better established contacts of investment bankers with firm's executives can boost the phenomenon of chasing deals and lead to value destruction at acquisitions.

We investigate whether closer contacts between conflicted investment bankers and corporate management established at IPO, lead the firms to perform acquisitions characterized with negative market reaction. Bankers, who have underwritten company's IPO issue, have preferential access to its corporate executives, in that the banks can identify and pitch potential takeover targets deliberately and insistently. In line with the fee generating hypothesis, we find that the abnormal returns at acquisitions are lower for firms that went public with banks actively advising on M&A, and when the underwriter's current M&A business is deteriorating.

Keywords: investment banking, mergers and acquisitons, IPO underwriters, relationship banking

JEL Classification: G24, G34, G14