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

Author:

Huang Jian1,Yu Han2,Zhang Zhen3

Affiliation:

1. College of Business and Economics, Department of Finance, Towson University, Towson, MD 21252, USA

2. School of Business, Department of Finance and Real Estate, Southern Connecticut State University, New Haven, CT 06515, USA

3. College of Business and Economics, Towson University, Department of Accounting, Towson, MD 21252, USA

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.

Publisher

MDPI AG

Subject

Finance,Economics and Econometrics,Accounting,Business, Management and Accounting (miscellaneous)

Cited by 1 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

1. COVID-19 impact on cross-border M&A advisory business in Japan;Review of International Business and Strategy;2024-09-12

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