Do investment banks create value for their clients? Empirical evidence from European acquisitions

Date01 January 2019
Published date01 January 2019
DOI: 10.1111/eufm.12144
Do investment banks create value for their clients?
Empirical evidence from European acquisitions
Johannes Kolb
University of Hohenheim, Department of
Corporate Finance, Wollgrasweg 49,
70599 Stuttgart, Germany
Emails: johannes.kolb@uni-;
Europe providesan interesting setting to explore the rolethat
investmentbanks play in acquisitions becauseit is composed
of countries with different legal regimes the shareholder-
oriented common law regime in the UK/Ireland and the
stakeholder-orientedcivil law regime in ContinentalEurope.
Since investment banks are hired to act in the interests of
shareholders, and due to differences in disclosure require-
ments, market transparency, accounting standards, and
ownership between theUK and Continental Europe, I argue
that investment banks are relatively more important in
UK-only acquisitions. My findings support this conjecture.
corporate governance, Europe, investment banks, law and finance,
mergers and acquisitions
G34, G38, G14, G24
Most firms are not frequent bidders, and many managers may lack the skills necessary to initiate and
execute value-creating acquisitions. Moreover, executives who decide to acquire another firm are
I thank the editor (John Doukas) and an anonymous referee for valuable feedback that substantially improved the paper.
I am grateful to Tereza Tykvová, Monika Gehde-Trapp, Robert Jung, Michael Howard, and participants of the finance
research seminar at University of Hohenheim in June 2016 for their helpful conversations and feedback. I also received
helpful comments from participants of the research seminar series at Texas A&M University in November 2016.
I gratefully acknowledge the access to SDC Platinum, Compustat, Capital IQ, and Datastream provided by DALAHO,
University of Hohenheim. I thank Peter Kessler for valuable research assistance.
© 2017 John Wiley & Sons, Ltd. Eur Financ Manag. 2019;25:80115.
under high pressure, as this choice is important for the future of their firms, the shareholders, and the
executives career. In a successful acquisition, synergies may be created, whereas in an unsuccessful
one, the firm is led into financial, operational, and strategic difficulties, which might eventually lead to
bankruptcy (Bao & Edmans, 2011).
Little acquisition know-how might be one reason that many managers rely on intermediaries
experienced and skilled in executing acquisitions, namely, investment banks that act as financial
advisors. In terms of value, advisors were involved in approximately 75% of all European acquisitions
between 2000 and 2015. With fees of approximately 1% of the acquisition value
(see, e.g.,
McLaughlin, 1990, 1992), this equals a fee income of about US$85 billion over the period. In terms of
number, European bidders employ advisors in 32% of all acquisitions. Servaes and Zenner (1996)
argue that advisors provide valuable services to their clients, because they reduce transaction costs,
information asymmetries, and agency costs. Advisors might be able to screen the market, identify
promising targets, negotiate favorable terms at a lower cost and more efficiently than bidders that
execute an acquisition without an advisor (in-house acquisition). Furthermore, as repeated players in
the acquisition market, advisors may be able to build up and maintain their reputation by offering
consistently high-quality services (Golubov, Petmezas, & Travlos, 2012). In opposition to this
theoretical proposition, there is ongoing debate in the empirical literature on the US market on the
question of whether advisors help bidders to create shareholder value and whether they are worth the
cost. While the bulk of the literature documents an insignificant or even negative association between
bidder value creation and either advisor involvement (Servaes & Zenner, 1996; Wang & Whyte, 2010)
or advisor quality (Bowers & Miller, 1990; Hunter & Jagtiani, 2003; Ismail, 2010; Michel, Shaked, &
Lee, 1991; Rau, 2000), only two studies report a positive relation between bidder value creation and
advisor quality (Golubov et al., 2012; Kale, Kini, & Ryan, 2003).
In contrast to the United States, Europe is characterized by different corporate governance and
regulatory regimes most notably common law in the UK
and civil law in Continental Europe (CE).
The UK is characterized by a market-based system that relies on case law and focuses on the effective
protection of shareholder rights. In CE, the blockholder-based system, which is based on codified law,
focuses on the protection of stakeholders such as creditors and employees (Goergen, Martynova, &
Renneboog, 2005; Martynova & Renneboog, 2011b). Specifically, in the UK, there are higher
disclosure rules, higher market and regulatory transparency, less concentrated ownership, better
developed stock markets, and better protection of minority and majority shareholders than in CE
(Djankov, La Porta, Lopez-de-Silanes, & Shleifer, 2008; Faccio & Lang, 2002; Goergen &
Renneboog, 2004; La Porta, Lopez de Silanes, & Shleifer, 1999; La Porta, Lopez de Silanes, Shleifer,
& Vishny, 1997, 1998; McCahery, Moerland, Raaijmakers, & Renneboog, 2002). Europe appears to be
an interesting testing ground to provide further insights into the role of advisors in acquisitions and to
analyze whether the value advisors create differs given different regimes.
I argue that advisors are particularly valuable in acquisitions in which the bidder and target are both
located in the UK. The shareholder-oriented system in the UK is run in the interests of shareholders
rather than in the interests of stakeholders of a corporation (Magill, Quinzii, & Rochet, 2015;
Martynova & Renneboog, 2011b). Proponents of the shareholder-oriented system believe in the
invisible handand argue that perfect markets and profit-maximizing agents are also in the best
interests of stakeholders (Magill et al., 2015). Moreover, shareholders have a sunk investment that they
lose in case of bankruptcy, whereas stakeholders such as employees can walk away relatively easily
Source: SDC Platinum.
UK includes Great Britain and Ireland.
from the company in such a circumstance (Shleifer & Vishny, 1997). Based on a survey, Yoshimori
(1995) shows that 70.5% of managers in the UK and only 17.3% of managers in Germany state that a
company should be managed mainly by giving shareholder interests first priority. Since advisors are
hired by managers, shareholders, or the board (and not by stakeholders), their priority should be to
maximize shareholder value. This is in line with the academic view, as the literature proposes that [...]
managers should use the same decision in choosing an investment banker as in all other corporate
decisions: by evaluating the impact on shareholder wealth(Bowers & Miller, 1990, p. 34) and [...]an
investment banker or some similar intermediary acting as a monitor for the collective interest of
shareholders [...](Easterbrook, 1984,p. 654). The common law regime in the UK, with rules that give
priority to shareholder interests, should allow advisors to effectively increase bidder shareholder value
in UK-only acquisitions.
In my sample of 2,969 inter-European acquisitions from the first quarter of 2001 to the third quarter
of 2015, advisors seem to be valuable, as they help bidders to create shareholder value on average.
When I compare advisor involvement in the UK with CE, the results suggest that advisors create
shareholder value for their clients when the bidder and the target are both located in the UK but not
when either party is located in CE. These results are economically nontrivial, as bidders using advisors
appear to create 1.13 percentage points higher cumulative abnormal returns (CARs) in UKUK
acquisitions than bidders with advisors in CECE acquisitions. The difference translates into a higher
bidder CAR of US$25.19 million for a mean-sized bidder. The results seem to be robust to different
variable definitions and sample specifications as well as to potential endogeneity and causation
concerns. To address issues related to the endogenous choice to use an advisor in an acquisition, I use a
propensity score matching (PSM) and an instrumental variable (IV) approach. I construct the
instrument percent advisor in the spirit of Wang and Whyte (2010). This instrument captures the
frequency with which advisors are used by any bidder during the time leading up to the acquisition of
interest. Specifically, it reflects the percentage of the 20 acquisitions preceding a subject acquisition
where any bidder employed an advisor (these 20 acquisitions, sorted by their announcement date,
might be executed by different bidders). The underlying idea of the instrument is that if many bidders
use an advisor prior to the subject acquisition, this might serve as a justification for the CEO to use an
advisor for the current acquisition as well. I argue that this instrument satisfies both necessary
conditions to serve as a valid exclusion criterion.
The present study contributes to the literature in several ways. Empirical evidence on European
acquisition activity is limited, despite a massive increase in recent years. I extend the limited amount of
research that examines the European market after the end of the fifth takeover wave in the year 2001.
To my knowledge, no other studies besides Humphery-Jenner (2012), Dissanaike, Drobetz, and
Momtaz (2016), and Drobetz and Momtaz (2016) examine the European acquisition market after the
fifth takeover wave. Over the past 15 years, the European market has become as important as the US
market in terms of volume. In Figure 1, I depict yearly volumes of US and European acquisitions.
Aggregated acquisition activity in the United States between 2001 and 2015, at US$15.01 trillion, is
higher than that in Europe, at US$12.52 trillion. However, compared to the 1980s and 1990s, European
acquisition volume has come close to US levels. In 2007, acquisition activity reached higher levels in
Europe than in the United States.
This is the first study to examine the question of whether advisors help bidders to create shareholder
value in European acquisitions.
Whether advisors matter for bidder value creation in acquisitions has
Schiereck, Sigl-Grüb, and Unverhau (2009) analyze advisor quality in European acquisitions but do not address the
question of whether advisor involvement per se matters.

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