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Fairness Opinions in Mergers and Acquisitions

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  • Makhija, Anil K.

    (Ohio State U)

  • Narayanan, Rajesh P.

    (U of Georgia)

Abstract

Fairness opinions provided by investment banks advising on mergers and acquisitions have been criticized for being conflicted in aiding bankers further their goal of completing the deal as opposed to aiding boards (and shareholders) by providing an honest appraisal of deal value. We find empirical support for this criticism. We find that shareholders on both sides of the deal, aware of the conflict of interest facing advisors, rationally discount deals where advisors provide fairness opinions. The reputation of the advisor serves to mitigate this discount, while the contingent nature of advisory fees appears to have no impact. Furthermore, consistent with the criticism of fairness opinions, we find evidence suggesting that fairness opinions are sought by boards for the legal cover they provide against shareholders unhappy with the deal's terms. Thus, altogether our findings suggest that investment bankers and boards may be complicit in using fairness opinions to further their own interests at an expense to shareholders.

Suggested Citation

  • Makhija, Anil K. & Narayanan, Rajesh P., 2007. "Fairness Opinions in Mergers and Acquisitions," Working Paper Series 2007-11, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2007-11
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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2007/2007-11.pdf
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    References listed on IDEAS

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    Cited by:

    1. La Mura, Pierfrancesco & Rapp, Marc Steffen & Schwetzler, Bernhard & Wilms, Andreas, 2011. "The certification hypothesis of fairness opinions for acquiring firms," International Review of Law and Economics, Elsevier, vol. 31(4), pages 240-248.
    2. Richard Connell & Tatiana Zalan, 2012. "Should management consultants charge clients on a contingency basis for merger and acquisition work?," The Service Industries Journal, Taylor & Francis Journals, vol. 32(16), pages 2677-2689, December.
    3. Lobe, Sebasian & Schenk, Nils-Christian, 2009. "Fairness Opinions and Capital Markets: Evidence from Germany, Switzerland and Austria," ECMI Papers 1596, Centre for European Policy Studies.

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    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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