Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Contrary to popular belief, investment banks do add value to M&As, new study shows

22.05.2012
Investment bankers often are stereotyped as greedy, overpaid leeches who will say or do anything for a quick buck.
However, despite certain biases, investment banks do add value to mergers and acquisitions and, in fact, produce important information for the M&A advisory process, according to new research by Matthew Cain, assistant professor of finance at the University of Notre Dame's Mendoza College of Business.

The lead author of "Information Production by Investment Banks: Evidence from Fairness Opinions," forthcoming in the Journal of Law and Economics, Cain analyzes a sample of more than 500 fairness opinion valuations that investment banks produce in relation to mergers and acquisitions, one of the primary business units of investment banking. Cain says the fairness opinion valuations they produce provide an objective product that can be analyzed to shed light on the motivations and value added by investment bankers.

"Investment banks do tend to produce valuations that are biased in a way that benefits their clients, which negatively affects their credibility," Cain says. "They produce overly optimistic valuations when hired by bidders in mergers, which can justify overbidding, and by some measures they produce pessimistic valuations when hired by targets in mergers, which can justify the acceptance of offers. Both actions tend to push their clients to consummate mergers; they have incentive to do this because they often earn advisory fees only after a given merger is completed."

However, Cain also finds that despite these potential biases, investment banks still produce new and valuable information through their valuations.
"They can be useful to boards of directors in evaluating merger proposals," he says. "And when the valuations are made public, the stock market reacts to the information contained in these valuations. Therefore, investment banks do produce information that has value as part of the M&A advisory process."

So, how can biased valuations be worth anything?

"Think of it this way." Cain says, "The absolute level is shifted too far in one direction, but the relative difference among valuations has meaning. Stock analyst recommendations are similar. They tend to be slightly optimistic in their buy recommendations, so to correct for this, you can subtract one notch and then compare the relative recommendations among different stocks. Boards of directors and investors should do the same thing when they consider valuations contained in fairness opinions."

Also the lead author of "Cleared for Takeoff? CEO Personal Risk-Taking and Corporate Policies," Cain's areas of specialty include mergers and acquisitions, corporate governance and financial contracting.

Matthew Cain | EurekAlert!
Further information:
http://www.nd.edu

More articles from Business and Finance:

nachricht Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: MPSD team discovers light-induced ferroelectricity in strontium titanate

Light can be used not only to measure materials’ properties, but also to change them. Especially interesting are those cases in which the function of a material can be modified, such as its ability to conduct electricity or to store information in its magnetic state. A team led by Andrea Cavalleri from the Max Planck Institute for the Structure and Dynamics of Matter in Hamburg used terahertz frequency light pulses to transform a non-ferroelectric material into a ferroelectric one.

Ferroelectricity is a state in which the constituent lattice “looks” in one specific direction, forming a macroscopic electrical polarisation. The ability to...

Im Focus: Determining the Earth’s gravity field more accurately than ever before

Researchers at TU Graz calculate the most accurate gravity field determination of the Earth using 1.16 billion satellite measurements. This yields valuable knowledge for climate research.

The Earth’s gravity fluctuates from place to place. Geodesists use this phenomenon to observe geodynamic and climatological processes. Using...

Im Focus: Tube anemone has the largest animal mitochondrial genome ever sequenced

Discovery by Brazilian and US researchers could change the classification of two species, which appear more akin to jellyfish than was thought.

The tube anemone Isarachnanthus nocturnus is only 15 cm long but has the largest mitochondrial genome of any animal sequenced to date, with 80,923 base pairs....

Im Focus: Tiny light box opens new doors into the nanoworld

Researchers at Chalmers University of Technology, Sweden, have discovered a completely new way of capturing, amplifying and linking light to matter at the nanolevel. Using a tiny box, built from stacked atomically thin material, they have succeeded in creating a type of feedback loop in which light and matter become one. The discovery, which was recently published in Nature Nanotechnology, opens up new possibilities in the world of nanophotonics.

Photonics is concerned with various means of using light. Fibre-optic communication is an example of photonics, as is the technology behind photodetectors and...

Im Focus: Cost-effective and individualized advanced electronic packaging in small batches now available

Fraunhofer IZM is joining the EUROPRACTICE IC Service platform. Together, the partners are making fan-out wafer level packaging (FOWLP) for electronic devices available and affordable even in small batches – and thus of interest to research institutes, universities, and SMEs. Costs can be significantly reduced by up to ten customers implementing individual fan-out wafer level packaging for their ICs or other components on a multi-project wafer. The target group includes any organization that does not produce in large quantities, but requires prototypes.

Research always means trying things out and daring to do new things. Research institutes, universities, and SMEs do not produce in large batches, but rather...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

SEMANTiCS 2019 brings together industry leaders and data scientists in Karlsruhe

29.04.2019 | Event News

Revered mathematicians and computer scientists converge with 200 young researchers in Heidelberg!

17.04.2019 | Event News

First dust conference in the Central Asian part of the earth’s dust belt

15.04.2019 | Event News

 
Latest News

Concert of magnetic moments

14.06.2019 | Information Technology

Materials informatics reveals new class of super-hard alloys

14.06.2019 | Materials Sciences

New imaging modality targets cholesterol in arterial plaque

14.06.2019 | Medical Engineering

VideoLinks
Science & Research
Overview of more VideoLinks >>>