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Information Production by Investment Banks: Evidence from Fairness Opinions

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  • Matthew D. Cain
  • David J. Denis

Abstract

We analyze a direct product of the investment banking process: target firm valuations disclosed in the fairness opinions of negotiated mergers. On average, acquirer advisers exhibit positive valuation errors that are significantly greater than those of target advisers. Top-tier advisers produce more accurate valuations than lower tier advisers, but we find no relation between valuation accuracy and the contingency structure of advisory fees. The stock price reactions to merger announcements and to the public disclosure of target-sought 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 investment banks produce information not previously available to market participants through the rendering of target-side fairness opinions.

Suggested Citation

  • 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.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/666877
    DOI: 10.1086/666877
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    3. Jian Huang & Han Yu & Zhen Zhang, 2023. "External vs. In-House Advising Service: Evidence from the Financial Industry Acquisitions," JRFM, MDPI, vol. 16(2), pages 1-21, January.
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    5. Anup Agrawal & Tommy Cooper & Qin Lian & Qiming Wang, 2013. "Common Advisers in Mergers and Acquisitions: Determinants and Consequences," Journal of Law and Economics, University of Chicago Press, vol. 56(3), pages 691-740.
    6. Greene, Daniel, 2016. "The wealth of private firm owners following reverse mergers," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 56-75.
    7. Daniliuc, Sorin & Guo, Hui & Wee, Marvin, 2023. "The usefulness of financial advisors to government-influenced Chinese acquirers," Global Finance Journal, Elsevier, vol. 55(C).
    8. Petri Hukkanen & Matti Keloharju, 2019. "Initial Offer Precision and M&A Outcomes," Financial Management, Financial Management Association International, vol. 48(1), pages 291-310, March.
    9. Fernando, Chitru S. & Gatchev, Vladimir A. & May, Anthony D. & Megginson, William L., 2015. "Prestige without purpose? Reputation, differentiation, and pricing in U.S. equity underwriting," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 41-63.

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