FIN-01-016

Investment Banking Relationships and Merger Fees

October 2001

Anthony Saunders and Anand Srinivasan

ABSTRACT

This paper is among the first to investigate the effect of a prior investment banking relationship on merger advisory fees paid by acquiring firms. We find that acquiring firms pay a higher fee to advisors when they have had a continuing relationship and a lower fee when they switch to an advisor with whom they have had no prior relationship. We develop a measure of relationship strength between an acquiring firm and its merger advisor based on previous debt, equity and merger transactions completed by the acquiring firm. We also examine the relationship between a merger advisor’s reputation and its ability to retain clients. We find that firms are more likely to switch if their M and A advisor is not a top tier investment bank. To test if higher fees are compensation for better performance, we examine differences between the average announcement returns of acquiring firms that switch advisors and those that do not. We find no significant difference between these two return samples. Overall, our findings indicate that acquiring firms perceive benefits of retaining merger advisors with whom they have had a prior relationship (even at the cost of higher fees) and/or they face some other (higher) costs of switching to new bank advisors.

Anthony Saunders
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Email: asaunder@stern.nyu.edu
Telephone: (212) 998-0711
Homepage: http://www.stern.nyu.edu/~asaunder/

Anand Srinivasan
Institution: Terry College of Business, University of Georgia, Brooks Hall, Athens, GA 30602-6253
Email: asriniva@terry.uga.edu
Telephone: (706) 369-0867

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