Thursday, June 16, 2011
Matt Cain and David Denis have a new paper, Information Produciton by Investment Banks: Evidence from Fairness Opinions. The result is a little counter-intuitive for the cynical among us who might view the value of a fairness opinion with some suspicion.
Abstract: We analyze a direct product of the investment banking process: target firm valuations disclosed in the fairness opinions of negotiated mergers. On average, acquirer advisors exhibit a greater degree of positive valuation bias than do target advisors. Top-tier advisors produce more accurate valuations than lower-tier advisors, but valuation accuracy is unrelated to the contingency structure of advisory fees. The stock price reactions to merger announcements and to the public disclosure of fairness opinions are positively related to the difference between target firm valuations contained in the fairness opinion and the merger offer price. We conclude that investment banks produce information not previously available to market participants through the rendering of fairness opinions.