The Impact of Financial Advisors on Risk Arbitrage Spreads: Evidence from Nordic Takeover Bids

Abstract: Following the announcement of a public takeover bid, the target firm's stock price generally adjusts towards the offer price. However, these rarely converge, and the percentage difference that emerges forms what is commonly referred to as the risk arbitrage spread. Prior research has emphasized that the spread should reflect the probability of deal completion, the time to resolution, and the magnitude of a bid revision. Besides, related literature examining the importance of financial advisors in corporate takeovers has shown that higher-ranked banks should exert significant influence on offer outcomes. This paper explores the relationship between bidders' M&A advisors and arbitrage spreads by studying 211 public takeover bids on Nordic equity markets from 1999 through 2019. Empirically, we find that acquirers advised by top-tier investment banks are associated with significantly lower risk arbitrage spreads. We attribute the differential impact of higher-ranked advisors to their greater ability to achieve closure faster than lower-tier alternatives. The shorter time to resolution may reflect top-tier banks' superiority in terms of skills and expertise or them facing strong incentives in their fee structures to complete deals faster. The results are robust to controlling for the endogeneity of advisor-firm matching, which leads us to conclude that the bidding firms' financial advisors are important for determining offer outcomes and risk arbitrage spreads.