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Expert advice in the presence of conflicts of interest: the case of star-crossed acquisitions

Author

Listed:
  • Gil Aharoni

    (University of Melbourne and Financial Research Network (FIRN))

  • Bryan Lim

    (University of Melbourne and Financial Research Network (FIRN))

  • Lubomir P. Litov

    (University of Oklahoma)

  • Jordan B. Neyland

    (George Mason University)

Abstract

Expert advice is presumed to be more valuable, but, when the expert has a conflict of interest, overcoming that conflict is difficult. We examine the performance of acquirers who hire an adviser that employs an expert—a star analyst—who covers the target and show that such “star-crossed” acquirers fare worse than other acquirers along multiple dimensions, including lower announcement returns and higher subsequent goodwill impairments. We consider various explanations for these outcomes, and the evidence strongly points toward star-crossed acquirers being unable to mitigate their advisers’ conflict of interest. Surprisingly, our analysis suggests that star-crossed managers are uninformed ex-ante about the low quality of the deals. Finally, we posit that a star-crossed adviser’s advantage increases with the opacity of the target firm’s accounting. Consistent with this, we find that, in star-crossed deals only, acquirer announcement returns decrease with target opacity.

Suggested Citation

  • Gil Aharoni & Bryan Lim & Lubomir P. Litov & Jordan B. Neyland, 2023. "Expert advice in the presence of conflicts of interest: the case of star-crossed acquisitions," Review of Accounting Studies, Springer, vol. 28(4), pages 1972-2001, December.
    • Handle: RePEc:spr:reaccs:v:28:y:2023:i:4:d:10.1007_s11142-022-09679-z
    DOI: 10.1007/s11142-022-09679-z
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