Chapter 6: Middle-Status Opportunism: Financial Advisors and Their Risky Acquisition Endorsements

In conducting acquisitions, acquirers often hire financial advisors as independent third parties and ask for their endorsement, aiming to assuage their shareholders’ concerns. The market for financial advisors is status-based as acquirers seek higher-status advisors (rather than lower-status advisors) assuming that higher-status advisors can better discern good from poor acquisitions because they are more trustworthy and competent. The authors challenge such an assumption by suggesting that the status-based market for advisors may fail among middle-status advisors. Middle-status advisors experience strong competition from higher-status advisors in attracting and retaining clients. Such pressure incentivizes middle-status advisors to endorse even risky deals that are more likely to result in acquisition failure. In contrast, high-status advisors have little incentive to endorse risky deals; low-status advisors are overlooked by acquirers needing strong external endorsement. Based on 828 deals by US acquiring firms, the authors find advisors’ status and the acquisition premium their clients pay to have an inverted U-shaped relationship, suggesting that middle-status advisors have the greatest likelihood to endorse overvalued acquisition deals.