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In-house deals: Agency and information asymmetry perspectivesDownload This Article
This work is licensed under a Creative Commons Attribution 4.0 International License.
Mergers and Acquisitions (M&A) advisors add value by overcoming the information asymmetries between acquirers and targets, but may also push bad deals through due to incentive misalignment stemming from contingent fees. In-house deals are those acquisitions with in-house advisors. We examine the wealth effect of M&A deals advised by in-house advisors versus outside advisors. About 15% of acquisitions are done via in-house advisors. In-house deals result in higher CARs to targets, insignificant wealth effects to acquirers, but lower cumulative abnormal combined returns. This finding is consistent with the view that the information asymmetry problem is more severe than the agency conflict in non-financial acquisitions. Thus, targets are more likely to extract wealth away from the acquirers, or the overall deal quality is lower. Also, consistent with the view that investment banks have an incentive to see deals completed, the completion rate is higher for deals with an outside advisor.
Keywords: In-house Deals, Mergers and Acquisitions (M&As) Advisors, Information Asymmetry, Incentive Misalignment
Authors’ individual contribution: Conceptualization – F.C., J.H., M.M., and H.Y.; Investigation – H.Y.; Writing – Original Draft – H.Y.; Writing – Review & Editing – F.C. and M.M.; Supervision – J.H. and H.Y.
Declaration of conflicting interests: The Authors declare that there is no conflict of interest.
Acknowledgements: We would like to thank Mark Wu (discussant) and participants at China International Risk Forum 2019 for helpful comments.
JEL Classification: G14, G24, G34
Published online: 04.01.2021
How to cite this paper: Chen, F., Huang, J., Ma, M., & Yu, H. (2021). In-house deals: Agency and information asymmetry perspectives. Corporate Ownership & Control, 18(2), 8-19. https://doi.org/10.22495/cocv18i2art1