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Investment banks as insiders and the market for corporate control

Author: Bodnaruk, Andriy ; Massa, Massimo ; Simonov, AndreiINSEAD Area: FinanceIn: Review of Financial Studies, vol. 22, no.12, December 2009 Language: EnglishDescription: p. 4989-5026.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: We study holdings in merger and acquisition (MandA) targets by financial conglomerates in which affiliated investment banks advise the bidders. We show that advisors take positions in the targets before MandA 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 who are privy to important information about the deal, investing in the target in the expectation of its price increasing. We document the high profits of this strategy. 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 conflict of interest affecting financial intermediaries simultaneously advising on deals and investing in equities
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We study holdings in merger and acquisition (MandA) targets by financial conglomerates in which affiliated investment banks advise the bidders. We show that advisors take positions in the targets before MandA 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 who are privy to important information about the deal, investing in the target in the expectation of its price increasing. We document the high profits of this strategy. 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 conflict of interest affecting financial intermediaries simultaneously advising on deals and investing in equities

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