Do bidders hire top-tier investment banks to certify value?

P. Raghavendra Rau and Kimberly Rodgers

Krannert School of Management, Purdue University

Smeal College of Business Administration, Penn State University

We investigate why top-tier investment banks are hired to advise bidders in tender offers. Top-tier banks are not hired in complex transactions. They are hired by bidders with larger boards of directors, less concentrated equity ownership and less insider ownership. Additionally, announcement returns earned by the acquiror are not higher and long-term returns are lower if a top-tier bank is used. Finally, acquisitions advised by top-tier banks are more likely to be completed. Though our evidence is partly consistent with the hypothesis that firms top-tier investment banks to certify deal value, we argue that it is more consistent with an alternative hypothesis that they are hired by managers and directors with poorly-aligned incentives simply to ensure the deal is completed.

Journal of Economic Literature Classification Codes: G32; G34

This paper has been presented at:

• American Finance Association Meetings, Atlanta, January 2002
• Financial Management Association European meetings, Paris, 2001
• Financial Management Association meetings, Seattle, 2000
• European Finance Association meetings, London 2000
• European Financial Management Association meetings, Athens, 2000

• The Darden School, University of Virginia, Charlottesville, March 2002;
• Michigan State University, February 2002;
• Texas A&M University, February 2002;
• Olin School of Business, Washington University, St. Louis, January 2002;
• The Hong Kong University of Science and Technology, December 2001

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