Investment Banks as Insiders and the Market for Corporate Control

Massimo Massa, Andrei Simonov and Andriy Bodnaruk

No 6953, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Insider trading; Mergers and acquisitions; Risk arbitrage (search for similar items in EconPapers)
JEL-codes: G23 G32 G34 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (1)

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Journal Article: Investment Banks as Insiders and the Market for Corporate Control (2009)
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