ADVERSE CONTRACT INCENTIVES AND INVESTMENT BANKER REPUTATION: TARGET FIRM TENDER OFFER FEES

Authors


  • I am indebted to Robert Taggart and John Parsons for many helpful discussions and to Michael Anderson, Paul Asquith, Lawrence Benveniste, Alan Marcus, Hamid Mehran, Robert Merton, Richard Ruback, and Hassan Tehranian for their comments and suggestions.

Abstract

I measure the potential economic importance of fee-contract incentives and investment banker reputation as factors that can mitigate conflicts of interest between investment bankers and their target firm clients in tender offers. I find that the fee contracts used between target firms and their investment bankers contain incentives that can create substantial conflicts of interest. Simulated losses from these adverse incentives can be large—up to 16.7 percent of target firm value. I also find, however, that when investment banker reputation capital is included in the simulation, losses are substantially reduced.

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