Dual Role Advisors and Conflicts of Interest

Abstract

An advisor to a firm targeted in a merger or acquisition that simultaneously is involved in financing the bidding part of the deal is referred to as a dual role advisor. Being a dual role advisor can create conflicts of interest through the possible perception that the investment bank's advice to the seller throughout the bidding process is tainted by a desire on the part of the advisor to obtain additional fees from financing the successful bidder. I find support for this fear in a study of 1,023 public US mergers and acquisitions over the period 1993 to 2008. Conflicts of interest are manifested through that deals which involve a dual role advisor are, compared to deals with no dual role advisors; (a) performed at lower premium, (b) are more likely to be subject to a lawsuit, (c) feature lower merger advisor fees and (d) are commensurate with higher announcement returns for bidders. All in all, the results suggest that investment banks may not have fulfilled their obligation of obtaining the highest possible price on behalf of the seller and I find no evidence that dual role advising is a helpful feature in transactions where it might be difficult to otherwise obtain bidding financing. Interestingly, target firms with sound corporate governance practices are less likely to encounter dual role situations.

Keywords: Conflicts of interest, mergers and acquisitions, investment banking

JEL Classification: G24, G34