External vs. In-House Advising Service: Evidence from the Financial Industry Acquisitions

Jian Huang, Han Yu () and Zhen Zhang
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Jian Huang: College of Business and Economics, Department of Finance, Towson University, Towson, MD 21252, USA
Han Yu: School of Business, Department of Finance and Real Estate, Southern Connecticut State University, New Haven, CT 06515, USA
Zhen Zhang: College of Business and Economics, Towson University, Department of Accounting, Towson, MD 21252, USA

JRFM, 2023, vol. 16, issue 2, 1-21

Abstract: This study analyzes the wealth impact on M&A deals when the acquirers in the financial industry utilize external versus in-house advising services. A quasi-natural observatory setting is applied to investigate the costs and benefits of retaining a financial advisor. Based on agency theory, information asymmetry and conflict of interest both exist in the setting of M&A deals when acquirers use advisory services. We first find that almost 40% of financial acquirers are more likely to use in-house advising services, the frequency of which is significantly higher than that of non-financial acquisitions previously documented. Further, we find that in certain complex deals of greater information asymmetry, the frequency of retaining advisory services in-house is even higher. This finding suggests that for financial acquirers who possess expertise in the M&A market, the concern of conflict of interests (i.e., misaligned incentives) between the acquirers and their advisors are more salient than the concern of information asymmetry. More importantly, using the two-stage regressions method controlling the endogeneity of the choice between in-house versus external advisory services, this study finds that the three-day abnormal returns around the acquisition announcements are 4.5% higher for the acquirers retaining in-house advisory services, 18.7% higher for the corresponding target, and the combined merger gains are 2.2% higher. Overall, our findings provide direct evidence of the agency cost when an external advisor is hired and document the incremental values that the financial acquirers’ in-house advisory services may create.

Keywords: external advisors; in-house advisors; agency costs; information asymmetry; financial industry (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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