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Investment Banks as Insiders and the Market for Corporate Control

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Author Info
Bodnaruk, Andriy
Massa, Massimo
Simonov, Andrei
Abstract

We study holdings in M&A targets by financial conglomerates which affiliated investment banks advise the bidders. We show that advisors take positions in the targets before M&A announcements. These stakes are positively related to the probability of observing the bid and to the target premium. We argue that this can be explained in terms of advisors, privy to important information about the deal, investing in the target in the expectation of its price to increase. We document the high profits of this strategy. We also document a positive relationship between the advisory stake and the deal characteristics. The advisory stake is positively related to the likelihood of deal completion and to the termination fees. However, these deals are not wealth-creating: there is a negative relation between the advisory stake and the viability of the deal. These results provide new insights into the conflicts of interest affecting financial intermediaries simultaneously advising on deals and investing in equities.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6953.

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Date of creation: Sep 2008
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Handle: RePEc:cpr:ceprdp:6953

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Related research
Keywords: insider trading; mergers and acquisitions; risk arbitrage;

Find related papers by JEL classification:
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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