The Use of Independent Fairness Opinions and the Performance of Acquiring Firms

Abstract

A fairness opinion (FO) in a merger or an acquisition transaction is a report issued by an investment banker to certify the transaction price. The banker issuing the FO can be independent by providing only an FO and receiving a fixed fee. Alternatively, the banker can be nonindependent by also providing advisory services and hence also receiving a contingent fee. I investigate the effect of the acquirers' use of independent FOs and the contingent fees paid to the acquirers' issuing bankers on the acquirers' announcement returns and postannouncement returns and operating performance. I find that around a merger announcement, an acquirer with an independent FO earns a higher abnormal return than an acquirer with a nonindependent FO. In addition, the contingent fee charged by an acquirer's banker that issues an FO is found to be negatively associated with the same return. Moreover, the postbid abnormal return for an acquirer with an independent FO is higher than that for an acquirer with a nonindependent FO up to six months following a merger announcement. Furthermore, I find a negative relation between the contingent fee charged by an acquirer's issuing banker and the postannouncement operating performance of an acquirer. Overall, these results support the claim that the use of an independent FO plays an effective corporate governance role for an acquirer. These results are also consistent with the view that a higher contingent fee paid to the acquirer's banker that provides an FO intensifies the conflict of interest faced by the banker.