In our paper, When It Pays to Pay Your Investment Banker: New Evidence on the Role of Financial Advisors in M&As, forthcoming in the Journal of Finance, we provide new evidence on the role of financial advisors in M&As. Mergers and acquisitions (M&As) constitute one of the most important activities in corporate finance, bringing about substantial re-allocations of resources within the economy. In 2007 alone, when the most recent merger wave peaked, corporations spent $4.2 trillion on M&A deals worldwide. Investment banks advised on over 85% of these deals by transaction value, generating an estimated $39.7 billion in advisory fees.

The investment banking industry is dominated by a group of the so-called “bulge bracket” firms. These top-tier investment banks have built up reputation as experts in capital markets transactions, which, theoretically, should ensure that they perform superior services for their clients in return for premium fees. Surprisingly, however, the pertinent empirical literature fails to support this intuitive reputation-quality mechanism, and reports a negative or, at best, insignificant relationship between bidder financial advisor reputation and bidder returns in mergers and acquisitions. This raises several interesting questions. Does the reputational capital mechanism fail in the market for merger advisory services? If so, why do firms employ top-tier advisors? Are top-tier banks employed just as execution houses to ensure deal completion for their clients? Finally, are there situations where it pays off to pay for a top-tier financial advisor?

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