Want better acquisitions?
Put an investment banker on your board.
Friday, November 22, 2013 9:56 AM
Is a merger or acquisition in your company’s future? Then it may be a good idea to include an investment banker on your board of directors, according to new research at the University of Iowa.
The study, led by Erik Lie, a finance professor at the Tippie College of Business, found that firms with an investment banker on their boards pursued mergers and acquisitions more often, and that those firms performed better after the acquisition was completed than firms without investment bankers on their boards.
“We suggest that directors with investment banking experience help firms make better acquisitions, both by identifying better targets and by reducing the cost of the deals,” Lie said.
Lie said that corporate governance is so complex that trying to analyze its impact in broad studies is difficult; examining one piece of a board’s structure on corporate performance hence is more useful, he suggests.
He and his co-authors - former Tippie doctoral students Qianqian Huang, Feng Jiang and Ke Yang - examined nearly 2,500 acquisitions between 1999 and 2008. They found that 808 deals in which the acquiring company had an investment banker on its board had a stock price return that was 0.7 percent higher than those firms without an investment banker on its board.
The researchers also looked at more than 41,000 firms that had an investment banker on its board between 1998 and 2008. Those firms were 13.6 percent more likely to make an acquisition within a year of the appointment. Investment bankers’ experience may also help firms to negotiate better deals. The study found deals involving investment banker board members paid at least 12 percent lower fees than those that don’t have investment bankers.
The study, “The role of investment banker directors in M&A,” will be published in a forthcoming issue of the Journal of Financial Economics.