Contingent advisory fees in acquisitions

[P. Raghavendra Rau]

Investment Bank Reputation, Contingent Fee Payments, and the
Performance of Acquiring Firms

P. Raghavendra Rau
Purdue University

Contact: P. Raghavendra Rau <mailto:r...@mgmt.purdue.edu>
Fax: +1 765-494-9658
Phone: +1 765-494-4488
Postal: Krannert Graduate School of Management, Purdue University,
West Lafayette, IN 47907-1310, USA

JEL Classification: G34

Keywords: Mergers, Investment Bank Reputation, Long-horizon Event Studies,
Bootstrapping

Extant literature shows that the majority of investment bank advisory fees
in tender offers are payable contingent on bid outcome. This may create a
conflict of interest between the banker and the firm by biasing the bank's
advice in favor of completing the deal. A common conjecture made in the
literature is that a concern for its reputation will prevent the investment
bank from indulging in such opportunistic behavior. This paper investigates
the relation between bank reputation, contingent fee payments and acquiror
performance in mergers and tender offers. I find no evidence of any relation
in mergers. In tender offers, I find a positive relationship bewteen
investment bank reputation and contingent fee payments and a negative
relationship between reputation (and contingent fee payments) and the
post-acquisition performance of the acquiror, suggesting that the contingent
fee structure in tender offers is used to ensure that investment banks focus
on completing the deal.