Conflicts of Interest in Merger Advisory Services
38 Pages Posted: 18 Feb 2004
Date Written: February 2004
Conflicts of interest in combining lending with the merger advisement of acquiring firms are found using two separate methodologies. First, commercial banks that advise acquirers with which they have had a prior lending relationship experience a significantly negative abnormal return, averaging 37 basis points over the 3-day period surrounding the merger announcement date. Second, syndicated bank loans that are arranged by the acquirer's advisor after the merger announcement date trade at a significant discount in the secondary market, averaging 4.15%, as compared with syndicated bank loans arranged by banks with no advisory role. Moreover, general-purpose syndicated bank loans originated less than one year after the merger announcement date and arranged by the acquiring firm's advisor trade at an average discount of roughly 12% in the secondary loan market. Since the terms on these general-purpose loans are not set upon merger announcement, they are most subject to risk shifting and underpricing agency problems. These findings offer evidence consistent with the existence of conflicted loans (at below market terms) that are offered by the acquirer's commercial bank advisor in order to win merger advisory business.
Keywords: Relationship banking, investment bank advisors, commercial bank advisors, certification effect, conflict of interest effect, mergers, acquisitions
JEL Classification: G21
Suggested Citation: Suggested Citation