Do investment banks create value for their clients? Empirical evidence from European M&A

Abstract: Top tier banks are associated with superior skills and service, demonstrated by the higher advisory fees they charge. The actual value they add to their clients, however, remains a widely debated topic. We provide new evidence on the question by extending existing empirical research to the European M&A market. We find that, while Tier 1 advisers (retained by either acquirer or target) increase target returns and deal premia, acquirers hiring Tier 1 advisers realize lower announcement returns than other bidders. Our results seem to support the deal completion hypothesis and suggest that acquirer advisers try to ensure closing by offering a higher price, negatively affecting acquirer returns. This can be interpreted either as a conflict of interest inherent in M&A mandates, or as acquirers having a preference for successful deal execution, rather than for direct merger gains. We also test the deal completion hypothesis directly, however, we do not find evidence nor confutation for top tier banks being more successful at closing deals than other advisers.