Showing papers on "Divestment published in 2010"

Why Do Firms Divest

Abstract: In this paper, I examine how lower-cost production and new market opportunities influence the divestment decisions of firms. I argue that lower-cost production and new market opportunities in foreign markets can provide a better use of existing firm resources and posit that these opportunities are likely to influence firm divestment of home-country operations. The empirical results from a panel of 190 U.S. firms over a 20-year period (1981--2000) show that lower-cost production and new market opportunities influence the divestment decisions of firms. However, the results also reveal several interesting moderating influences on the hypothesized trade-offs and differences across the growth strategies of firms in low-and high-research and development intensive industries. By considering how and when investment in lower-cost production and new market opportunities impacts firm divestment decisions, this study examines divestment not only as a choice managers make when dealing with poor or struggling operations, but also as a response to better opportunities for firm resources in other markets. By focusing on the trade-offs managers make across product and geographic markets, this paper examines the role divestment can play in firm growth and expansion strategies.

Why do foreign banks withdraw from other countries? A panel data analysis

Abstract: This paper describes the trends in foreign bank ownership across the world and presents, for the first time, empirical evidence of the causes of multinational banks’ exits from other countries. Using panel data for 149 closed or divested foreign bank subsidiaries across 54 countries from 1997 to 2009, we show that the problems encountered by subsidiaries were not the main cause of divestment by parent banks. Based on data for the parent banks of the closed subsidiaries, our results show that those parent banks reported significant financial weaknesses prior to closing their international operations. Therefore, we assume that a multinational bank’s decision to close or sell a subsidiary in another country is based mainly on problems in the home country, with a lesser factor being the weak performance of the foreign subsidiary.

Being Virtuous and Prosperous: SRI’s Conflicting Goals

Abstract: Can SRI be a means to make investors both virtuous and prosperous? This paper argues that there can be significant tensions between these goals, and that SRI (and indeed all investment) should not allow the pursuit of maximizing investment returns to prevail over an ethical agenda of promoting social and economic justice and environmental protection. The discourse on SRI has changed dramatically in recent years to the point where its capacity to promote social emancipation, sustainable development and other ethical goals is in jeopardy. Historically, SRI was a boutique sector of the market dominated by religious-based investors who sought to invest in accordance with the tenets of their faith. From the early 1970s, the aspirations of the SRI movement morphed significantly in the context of the divestment campaign against South Africa’s apartheid regime. No longer were social investors satisfied with just avoiding profit from immoral activities; instead, they also sought to change the behavior of others. Business case SRI is a problematic SRI benchmark for several reasons: often there is a countervailing business case for financing irresponsible activities, given the failure of markets to capture all social and environmental externalities; secondly, even if investors care about such concerns, there may be no means of financially quantifying their significance for investment purposes; and, thirdly, even if such factors can be financially quantified, they may be deemed to be such long-term financial costs or benefits that they become discounted and ignored. The ethics case for SRI and ethical business practices more generally takes the view that both investors and the companies they fund have ethical responsibilities that trump the pursuit of profit maximization. Ethical investment should be grounded on this foundation. However, it may not be enough. To keep ethical investment ethical will likely require institutionalizing new norms and governance standards, in such domains as reforming fiduciary duties and the internal governance of financial organizations. SRI’s own codes of conduct including the UNPRI have yet to demonstrate the robustness to move the financial community beyond business as usual.

Foreign Divestment: The Neglected Area of International Business?

Abstract: Foreign divestment (FD) has become an integral aspect of global strategy, yet it remains a neglected area among the international business and business strategy academies. It is now widely practice...

Privatization and Finance

Abstract: This paper summarizes research examining how privatization programs implemented by governments over the past three decades have changed the size and efficiency of global financial markets, altered the practice of corporate finance in economies that experienced large privatizations, and impacted the returns earned by individual investors who purchased stock in a privatized company. We show how sales programs have changed during the three historical eras of privatization: 1979-1990, 1992-2000, and 2002-2008, describe the principal methods that governments use to sell state-owned enterprises to private investors, and examine how governments choose between selling SOEs directly to existing operating companies or investor groups through direct sales (asset sales) or selling stock to investors through share issue privatizations (SIPs). We document and examine the role privatization has played in increasing the total market capitalization of global stock exchanges from $3.2 trillion in 1983 to over $62 trillion in 2007 - and to $45 trillion in late 2009 - and increasing the total value of shares traded increased from $1.2 trillion to $111 trillion over much the same period. SIPs have been the largest share offerings in history, particularly in emerging markets, and divestment programs have been so impactful that (fully and partially) privatized companies now account for roughly half of the entire market capitalization of non-U.S. stock markets. Privatized companies also dominate share trading in many non-U.S. markets, especially China - which now has the second highest annual value of shares traded. We show that investors have benefited from purchasing SIP shares, both in the short and long term, and attempt to answer the critical question: “what do governments have left to sell?” EU governments alone hold stakes in partially privatized firms worth over $650 billion, and emerging market governments (especially China’s) hold two to three times as much more.

The impact of hotel management contracting on IHRM practices: Understanding the bricks and brains split

Abstract: Purpose – The international hotel industry's growth has been achieved via the simultaneous divestment of real estate portfolios and adoption of low risk or “asset light” market entry modes such as management contracting The management implications of these market entry mode decisions have however been poorly explored in the literature and the purpose of this paper is to address these omissionsDesign/methodology/approach – Research was undertaken with senior human resource executives and their teams across eight international hotel companies (IHCs) Data were collected by means of semi‐structured interviews, observations and the collection of company documentationFindings – The findings demonstrate that management contracts as “asset light” options for international market entry not only provide valuable equity and strategic opportunities but also limit IHCs' chances of developing and sustaining human resource competitive advantage Only where companies leverage their specific market entry expertise and

Subsidiary Divestiture and Acquisition in a Financial Crisis: Operational Focus, Financial Constraints, and Ownership

Abstract: We exploit parent- and subsidiary-level data for publicly-listed firms in Thailand before, during, and after the 1997 Asian financial crisis to investigate the extent to which firms with different types of ownership restructure their business portfolios, in terms of divestitures and acquisitions. We compare restructuring choices made by firms mostly owned by (a) domestic individuals with block shares (family firms), (b) domestic firms and/or institutions (DI firms), and (c) foreign investors (foreign firms). We show that following the crisis (1) foreign firms’ restructuring behavior is the least affected; (2) domestic firms owned by families and domestic institutions (DI) behave similarly to one another; (3) domestic firms do not increase divestiture in their peripheral segments to improve operational focus or to obtain cash in a credit crunch; they actually reduce divestiture in core segments; (4) domestic firms also significantly reduce the acquisition of new subsidiaries. Our results challenge traditional explanations for divestiture such as corporate governance, operational refocus, and financial constraints. They indicate that in the great uncertainty of a crisis, domestic firms are able to hold onto their core assets to avoid fire-sale. In essence, they act more conservatively in churning their business portfolios.

Private Equity Exits: Divestment Process Management for Leveraged Buyouts

Abstract: Background.- Theoretical foundation and literature review.- The exit process: Reducing exposure to a portfolio company.- Empirical analysis: Exit behaviour and efficiency.- Conclusion.

Learning the wrong lessons from history: Underestimating strategic change in business turnarounds

Abstract: Firms that are able to shift their trajectory from continual failure to sustained success are rare, yet turnarounds do occur and are part of the business landscape. Little progress has been made over the last two decades in discovering the key factors that can lead to firms escaping from continual failure. This study examines turnarounds in the late twentieth century, finding that the importance of strategic change may have been significantly underestimated in previous turnaround research. Emphasis is given to the care that must be taken when constructing research methodologies to ensure we avoid learning the wrong lessons from history.

The role of leadership in international retail divestment

Abstract: Purpose – The purpose of this paper is to explore the role played by leadership in divestment decision making and indeed during the corporate restructuring phase for retail organisations. In doing so, the paper aims to contribute to a growing body of research that seeks to develop understanding of the factors leading to retail divestment and the nature of corporate response to divestment.Design/methodology/approach – A multiple case approach is utilised. The cases are selected from a database of international retail divestment activity over a longitudinal period.Findings – The paper demonstrates that divestment can be a response to “failure”, however, support is also provided for the assertion that divestment can be a strategic decision to devote resources more efficiently elsewhere, either at home or abroad. A key finding is the role of leadership and managerial stability in relation to divestment and restructuring at home and abroad.Research limitations/implications – The themes presented in this paper ...

Financial performance analysis of US and world telecommunications companies: Importance of Information Technology in the telecommunications industry after the AT&T breakup and the NTT divestiture

Abstract: This study investigates the financial performance of the world telecommunications industry by DEA-DA (Data Envelopment Analysis-Discriminant Analysis). The proposed use of DEA-DA has a linkage with Altman's Z score that has long served as a methodological and conceptual basis in finance. Based upon the Z score of telecommunications companies, we rank them for financial assessment. After evaluating their financial performance of the firms, this study pays attention to the financial performance of AT&T (American Telephone & Telegraph) and NTT (Nippon Telegraph and Telephone) after their divestiture. This study finds that AT&T outperformed NTT because AT&T changed itself to an IT (Information Technology) company that provides wireless communications services and other IT services, but NTT separated IT and wireless services into the other companies after the breakup.

Exit Strategies of Buyout Investments: An Empirical Analysis

Abstract: Although buyout investments represent a considerable proportion of private equity volume, so far little research has been done on the exit strategies of buyout investments. This article takes a step in this direction by investigating buyouts in more detail focusing particularly on the divestment process. Since exiting enables the realization of returns and is thus the most important factor for private equity investors, it is important to understand the motivation behind and the determinants influencing this decision. The authors analyze three main exit routes for exiting buyout investments: initial public offerings (IPO), sales and write-offs, using a unique data set for U.S. and European buyout transactions. They examine the determinants influencing the choice of an exit channel by employing a multinomial logit model. The results strongly support the view that private equity investors write-off investments that turn out to be non-performing early, showing their ability to filter out bad investments. They also analyze how the internal rate of return (IRR) influences which exit route is chosen. The results show that only the most profitable ventures are taken public. The results have implications for exiting buyout investments during financial crises.

Mergers and Partial Ownership

Abstract: In this paper we compare the profitability of a merger to the profitability of a partial ownership arrangement and find that partial ownership arrangements can be more profitable for the acquiring and acquired firm because they can result in a greater dampening of competition. We also derive comparative statics on the prices of the acquiring firm, the acquired firm, and the outside firms. In a dual context, we show that a cross-majority owner may have incentives to sell a fraction of the shares in one of the firms he controls to a silent investor who is outside the industry. Aggregate ex post operating profit in the two firms controlled by the cross-majority shareholder then increases, such that both the cross-majority shareholder and the silent investor will be better off with than without the partial divestiture.

Beyond economics for guiding large public policy issues: Lessons from the Bell System divestiture and the California electricity crisis

Abstract: During the summer (2000), wholesale electricity prices in California were approximately 500% higher than those during the same months in 1998-1999. This study finds that the price hike has occurred due to an increase in fuel prices and real demand. The change of the two market fundamentals explains 45.73% of the price increase and fluctuation during the crisis. The responsibility of energy utility firms is 21.41%. The policy implication regarding the California electricity crisis is different from well-known economic studies which have attributed the price hike to the exercise of market power. The difference points up a need for drawing on researchers from multiple disciplines who are capable of checking each other's methodologies in guiding large policy decisions. This need was suggested by Professor Cooper regarding the AT&T breakup two decades ago.

How much should you own? Cross-ownership and privatization

Abstract: This paper investigates the effects of cross-ownership on optimal privatization, and vice-versa, in mixed duopoly. It shows that cross-ownership is profitable to the private firm only if the level of privatization of the public firm is sufficiently high. In equilibrium, cross-ownership does not take place even if there is partial privatization. However, the possibility of cross-ownership significantly limits the socially optimal level of privatization in most of the situations. Moreover, it demonstrates that full nationalization is socially optimal, in case of sufficiently convex identical cost functions and homogeneous goods. These results have strong implications to both divestment and competition policies.

Assessing the Efficacy of Structural Merger Remedies: Choosing Between Theories of Harm?

Abstract: Previous empirical assessments of the effectiveness of structural merger remedies have focused mainly on the subsequent viability of the divested assets. Here, we take a different approach by examining how competitive are the market structures which result from the divestments. We employ a tightly specified sample of markets in which the European Commission (EC) has imposed structural merger remedies. It has two key features: (i) it includes all mergers in which the EC appears to have seriously considered, simultaneously, the possibility of collective dominance, as well as single dominance; (ii) in a previous paper, for the same sample, we estimated a model which proved very successful in predicting the Commission’s merger decisions, in terms of the market shares of the leading firms. The former allows us to explore the choices between alternative theories of harm, and the latter provides a yardstick for evaluating whether markets are competitive or not – at least in the eyes of the Commission. Running the hypothetical post-remedy market shares through the model, we can predict whether the EC would have judged the markets concerned to be competitive, had they been the result of a merger rather than a remedy. We find that a significant proportion were not competitive in this sense. One explanation is that the EC has simply been inconsistent – using different criteria for assessing remedies from those for assessing the mergers in the first place. However, a more sympathetic – and in our opinion, more likely – explanation is that the Commission is severely constrained by the pre-merger market structures in many markets. We show that, typically, divestment remedies return the market to the same structure as existed before the proposed merger. Indeed, one can argue that any competition authority should never do more than this. Crucially, however, we find that this pre-merger structure is often itself not competitive. We also observe an analogous picture in a number of markets where the Commission chose not to intervene: while the post-merger structure was not competitive, nor was the pre-merger structure. In those cases, however, the Commission preferred the former to the latter. In effect, in both scenarios, the EC was faced with a no-win decision. This immediately raises a follow-up question: why did the EC intervene for some, but not for others – given that in all these cases, some sort of anticompetitive structure would prevail? We show that, in this sample at least, the answer is often tied to the prospective rank of the merged firm post-merger. In particular, in those markets where the merged firm would not be the largest post-merger, we find a reluctance to intervene even where the resulting market structure is likely to be conducive to collective dominance. We explain this by a willingness to tolerate an outcome which may be conducive to tacit collusion if the alternative is the possibility of an enhanced position of single dominance by the market leader. Finally, because the sample is confined to cases brought under the ‘old’ EC Merger Regulation, we go on to consider how, if at all, these conclusions require qualification following the 2004 revisions, which, amongst other things, made interventions for non-coordinated behaviour possible without requiring that the merged firm be a dominant market leader. Our main conclusions here are that the Commission appears to have been less inclined to intervene in general, but particularly for Collective Dominance (or ‘coordinated effects’ as it is now known in Europe as well as the US.) Moreover, perhaps contrary to expectation, where the merged firm is #2, the Commission has to date rarely made a unilateral effects decision and never made a coordinated effects decision.

Vertical Separation of Telecommunications Networks: Evidence from Five Countries

Abstract: I. INTRODUCTION II. UNBUNDLING AND DISCRIMINATION IN TELECOMMUNICATIONS MARKETS: THE REGULATORY CASE FOR SEPARATION A. Mandatory Unbundling and the Incentive Problem B. Forms of Separation III. MANDATORY SEPARATION AND THE ECONOMICS OF VERTICAL INTEGRATION A. The Economics of Vertical Integration B. Empirical Evidence Relating to Vertical Integration C. Vertical Integration in Telecommunications Markets IV. MANDATORY SEPARATION 1N FIVE COUNTRIES A. The United Kingdom 1. A New Regulator 2. A New Policy: Functional Separation B. Australia C. Italy D. New Zealand E. Sweden V. EARLY EVIDENCE: THE EFFECTS OF VERTICAL SEPARATION ON BROADBAND PENETRATION AND INVESTMENT A. Broadband Growth 1. Broadband Growth in the United Kingdom 2. Broadband Growth in Australia, Italy, New Zealand, and Sweden B. Network Investment and Fiber Deployment 1. Network Investment and Fiber Deployment in the United Kingdom 2. Network Investment and Fiber Deployment in Australia, Italy, New Zealand, and Sweden VI. Is VERTICAL SEPARATION AN OPTION FOR THE UNITED STATES? A. Structural Separation in the U.S. Telecommunications Sector: A Brief History B. Unlike Countries That Have Adopted Functional Separation, the United States Has Virtually Ubiquitous Platform Competition C. Unbundling Existing U.S. Next Generation Networks Would Be Costly, If Not Infeasible VII. CONCLUSION I. INTRODUCTION Regulatory regimes that require vertically integrated firms to share hard-to-replicate infrastructures--such as electricity transmission lines, railroad tracks, or the last-mile connections in telecommunications networks--create potential incentive problems, as vertically integrated firms may be induced to discriminate against upstream or downstream competitors. For example, electricity firms might discriminate in favor of their own generation plants against independent generators; railroad track owners might discriminate against competing owners of rolling stock; or telecommunications network operators might discriminate against competing service providers. To prevent such discrimination, regulators sometimes adopt rules requiring equal treatment or "nondiscriminatory access" to bottleneck facilities--for example, requiring telephone companies to provision lines for competitors' retail customers as quickly and reliably as for their own. (1) Such regulations are subject to the limitations inherent in all such principal-agent relationships: regulators typically have incomplete information, monitoring and policing compliance is costly, and the results are likely to be imperfect. One approach to preventing discrimination is to require some form of vertical disintegration, or "separation," by the regulated firm. In their mildest forms, mandates for "accounting separation" may simply require the firm to maintain separate records for its upstream and downstream divisions, thus facilitating regulators' efforts to monitor compliance. (2) At the opposite end of the spectrum, regulators may force full structural separation, or complete divestiture, of the bottleneck facilities into a separate firm. In between, there is a potentially infinite range of "operational" or "functional" separation alternatives which impose various requirements for "arms-length" dealing, while stopping short of complete divestiture. (3) Current proposals for vertical separation are motivated primarily by perceived problems in implementing mandatory access (or unbundling) regimes, which force incumbents to lease portions of their last-mile networks to competitors at regulated prices. (4) While mandatory unbundling has been substantially scaled back in the United States (and was only briefly applied to broadband services in the form of line sharing), it remains a regulatory staple in much of the rest of the world, including the European Union and several Pacific Basin nations. …

Preventing Merger Unilateral Effects: A Nash–Cournot Approach to Asset Divestitures

Abstract: This paper aims to analyze the effectiveness of asset transfers in preventing unilateral effects of a merger. We show that asset divestitures allow the remedying of certain price increases. Market size negatively impacts the scope of the divestiture package, while the number of merging firms increases with it. In spite of the required asset sale, parties' profitability remains ensured in most cases. Buyers always make profit from their purchase if industry fixed costs are rather low. We also add the alternative of a second buyer and compare outcomes with both consumer and welfare standards. Furthermore, as many mergers lead to efficiency gains, we integrate specific cost synergies and show that the higher synergies, the smaller the divestiture share. In the case when no buyers are available, we show that the option of divesting to a start-up entity is bound to fail if firms' technology remains the same. Lastly, we find that product differentiation can reduce the efficiency of the asset transfer.

The Development of Competition in the UK Airport Market

Abstract: The UK Competition Commission recently ruled to force the divestment of three of the British Airports Authority's airports: two in London and one in Scotland. This paper examines the possible consequences of this decision. The Competition Commission envisions that it will be the responsibility of the Civil Aviation Authority in its role as airports regulator to modify regulation appropriately to promote competition. The author argues that, while economic regulation can be a justified response to the risk of abuse of market power, applied inappropriately it can inhibit the development of competition and ultimately harm consumers. The potential for greater competition is therefore likely to change the economic regulation applied to airports. Ensuring clarity about how the boundary between regulation and competition will operate should encourage competition. Reform of the statutory framework for regulation could be useful in supporting the transition to a more competitive market by providing a more flexible set of tools to regulate different levels of market power. Implications of government policy regarding airport development and the potential importance of European regulation are discussed.

Globalizing Partially Privatized Firms in Singapore: The Role of Government as a Regulator and a Shareholder

Abstract: Much has been written about privatization. Partial privatization is a lesser known fact, although most privatization programs begin with a period of partial rather than full divestment of state-owned enterprises (SOEs). In this type of privatization, the government plays the role of a regulator and a shareholder. This could give rise to conflicts of interest; for example, the possibility of political interest overriding the commercial interest. As a consequence, privatized SOEs may face difficulty in globalizing their business through financial and fixed asset investment. This article argues that setting up state-owned holding companies (SOHs) can be a constructive way to manage the important link between the government and the privatized SOEs and demarcate the government’s role as regulator and shareholder. By means of a case study, the Temasek Holdings Limited of Singapore, this article illustrates the Singapore’s experience in managing and globalizing partially privatized firms.

Divestment, Entrepreneurial Incentives, and the Life Cycle of the Firm

Abstract: An entrepreneur who wants to divest his firm suffers a time-inconsistency problem: divesting a stake creates an incentive to divest further since he does not internalize the arising agency costs for the stake already sold. This paper shows that this leads to excessive divestment in equilibrium and entails efficiency losses which can offset any potential divestment gains. As a result, firms may stay private even if there are large gains from going public. We show that venture capitalists can reduce these inefficiencies. This is because they have influence over a firm's divestment decisions and can distinguish between an excessive and a desirable dilution of equity (such as in response to liquidity shocks). We also show that the divestment inefficiency gives rise to an optimal time of going public, which trades off the gains from going public early (higher divestment gains) with its costs (higher divestment inefficiency).

Negative investment in China: financing constraints and restructuring versus growth

Abstract: This paper attempts to address a puzzle in China’s investment pattern: despite high aggregate investment and remarkable economic growth, negative net investment is commonly found at the microeconomic level. Using a large firm-level dataset, we test three hypotheses to explain the existence and extent of negative investment in each ownership group: what we term the efficiency (or restructuring) hypothesis, the (lack of) financing hypothesis, and the (slow) growth hypothesis. Our panel data probit estimations shows that negative investment by state-owned firms can be explained mainly by inefficiency: owing to over-investment or mis-investment in the past, these firms have had to restructure and to get rid of obsolete capital in the face of increasing competition and hardening budgets. The financing explanation holds for private firms, which have had to divest in order to raise capital. However, rapid economic growth weighs against both effects in all types of firms, with a larger impact for firms in the private and foreign sectors. A tobit model, estimated to examine the determinants of the amount of negative investment, yields similar conclusions.

An empirical analysis of the counterfactual: a merger and divestiture in the Australian cigarette industry

Abstract: In this paper we empirically analyse two counterfactual situations facing an anti-trust authority following the merger of two of the largest international cigarette companies. First we estimate a nested logit model of demand for cigarettes. The implied elasticity of demand for smoking and implied marginal costs are both broadly consistent with the limited independent estimates available. We then use the model to simulate the proposed merger and the partial divestiture that was accepted by the Australian anti-trust authority. A comparison of the relative price changes predicted by the divestiture simulation with the actual post-divestiture price changes shows the model successfully anticipated the behaviour of the divested brands. This suggests structural econometric analysis using a nested logit may be usefully utilised by anti-trust authorities to assess the welfare implications of proposed mergers and partial divestitures.

Irish public assets: establishment, control and privatisation of state-owned enterprises

Abstract: This article reviews the establishment and use of state-owned enterprises (SOEs) in Ireland. It notes the many difficulties experienced in obtaining a precise view of the composition of the Irish public sector and comments on ambivalent (and therefore often destructive) attitudes to the control of SOEs. It concludes with a privatisation case study, which demonstrates the ad hoc manner in which the divestment of public assets is often conducted, suggesting that altogether insufficient attention has been given in Ireland to values inherent in public ownership.

Terror‐free investment index screens: Corporate governance implications for non‐US multinational enterprises

Abstract: Purpose – The purpose of this paper is to address the corporate governance implications of the US terror‐free investment screens, instituted both legislatively and voluntarily, on the operations of non‐US multinational corporations (MNCs) concerning international trade and foreign direct investment with nations designated as “State Sponsors of Terrorism.”Design/methodology/approach – After a brief introduction to the issue of “terror‐free lists” and investment indexes and divestment screens, the paper summarizes the US Federal and State Laws pertaining to state sponsors of terrorism and their direct impact on international trade and investment transactions. The third section evaluates the success of environmental, social, and governance (ESG) indexes and investment screens compared to standard market investment indexes. The fourth section discusses the potential effects of terror‐free stock indexes and divestment (“social”) screens on corporate governance of non‐US corporations. In the final section, the ...

Performance Implications of Exit Timing in Industry Divestiture Waves

Abstract: The article analyzes how divestiture timing relative to industry peers affects divestiture stock market returns in industry divestiture waves. Industry divestiture waves are defined as periods of time characterized by relatively large number of divestitures reported in the same industry, where the activity intensifies at an increasing rate and then declines quickly. The influence of the specific firm contingencies of seller financial performance and unit relatedness are considered. The authors contend that early and late divestors generate higher stock market returns than firms that divest at the peak of an industry divestiture wave.

Investment Banks in Dual Roles: Acquirer M&A Advisors as Underwriters

Abstract: We analyze the dual role of investment banks that provide advice to acquiring firms and act as underwriters on the securities issued to finance the acquisition. We find that a significant fraction (56 percent) of acquirers that issue public securities to finance their acquisitions also use their advisor as the underwriter on the acquisition related security issue. We find that this dual role of the acquirer advisor is associated with lower acquirer announcement returns, higher target announcement returns, and higher acquisition premiums. These results are consistent with the existence of conflict of interest between the acquiring firm shareholders and their dual role advisor. We also find that, for larger transactions, which have the most potential for conflict of interest because of the larger fees involved, the relation between acquirer announcement returns and the dual advisor-underwriter role played by the acquirer’s investment bank is more negative. Acquisitions that are advised by dual role investment banks are more likely to be eventually divested. For larger transactions, the relation between the likelihood of divestiture and the dual advisor-underwriter role played by the acquirer’s investment bank is more positive. However, such a dual role of the acquirer advisor does not lead to lower underwriting fees or issue costs. Acquisitions involving dual role investment banks are completed faster, suggesting a potential motivation for using investment banks in such dual advisor-underwriter roles. Our results are robust to controlling for the selection of firms that finance their acquisitions with a security issue and the endogeneity of underwriter selection.