Fairness Opinions in Mergers and Acquisitions
Charles A. Dice Center Working Paper No. 2007-11
43 Pages Posted: 22 Mar 2007
Date Written: October 2007
Fairness opinions provided by investment banks advising on mergers and acquisitions have been criticized for being conflicted in aiding bankers further their goal of completing the deal as opposed to aiding boards (and shareholders) by providing an honest appraisal of deal value. We find empirical support for this criticism. We find that shareholders on both sides of the deal, aware of the conflict of interest facing advisors, rationally discount deals where advisors provide fairness opinions. The reputation of the advisor serves to mitigate this discount, while the contingent nature of advisory fees appears to have no impact. Furthermore, consistent with the criticism of fairness opinions, we find evidence suggesting that fairness opinions are sought by boards for the legal cover they provide against shareholders unhappy with the deal's terms. Thus, altogether our findings suggest that investment bankers and boards may be complicit in using fairness opinions to further their own interests at an expense to shareholders.
Keywords: Fairness Opinions, Mergers and Acquisitions, Investment Banking
JEL Classification: G34, G24
Suggested Citation: Suggested Citation