Connected Directors–Advisors and Mergers and Acquisitions Outcomes

Abstract

We examine the impact of social ties between directors (directors or senior managers) of acquiring firms and their corresponding advisors on several mergers and acquisitions outcomes. The social ties between acquirers’ directors and their advisors are positively related to acquirers’ gains in the short and long run. This is due to lower takeover premia, lower advisory fees and shorter period to deal completion. This relation is more pronounced in deals involving inexperienced acquirers, targets in more opaque industries and targets recommended by advisors. We also find that acquirers are more likely to withdraw from deals with high premia if they hire a socially connected advisor. Identification is addressed by using instrumental variables, excluding deals that are prone to endogeneity and using the propensity score matching and the entropy balancing methods.