The Role Of Financial Advisors In Acquisition Transactions And Performance

In recent years,the number and scale of domestic mergers and acquisitions(M&As)in China have increased substantially.The data in Wind database shows that the total volume of domestic M&A transactions made by Chinese listed companies was as high as 1,048.70 billion yuan in 2019.However,most of the targets of M&A transactions in China’s capital market are private companies.The buyer companies generally face problems such as low information transparency and poor financial reports credibility of target companies,which increase the risks and costs of M&A transactions.As a professional M&A intermediary agency,financial advisors can provide information for both parties of the transaction,help the buyer evaluate the value of the target,design M&A plans,decrease M&A premiums,and increase the success rate of transactions.In 2019,the total volume of M&As that hire a financial advisor was as high as636.30 billion yuan,which is almost 61% of the total amount of domestic M&As.The net income of the financial advisory business of securities companies was as high as 10.52 billion yuan.Most of the current research on M&A financial advisors examines the impact of financial advisors on M&A transactions and performance from perspectives of financial advisor’s‘company-level’ heterogeneity,including reputation,capabilities,industry expertise,and prior relationships with buyer companies.Scholars have found that financial advisers can help them identify and select the targets with stronger synergy,estimate the true value of the target more accurately,reduce the degree of information asymmetry,increase the success rate of M&As,and thereby improve M&As performance.However,scholars mainly focus on the ‘companylevel’ characteristics of investment banks and ignore the ‘personal-level’ heterogeneity of investment bankers who participate in each M&A.The Upper Echelon Theory holds that personal background characteristics,including work experience and educational background,have a crucial influence on their knowledge reserves,working ability,decision-making style,and risk appetite.Therefore,blindly treating all investment bankers as homogeneous will undoubtedly lead to biases in research results.In addition,existing studies have only focused on the advisory role of financial advisors,which is using their own professional knowledge and services to help their clients better complete M&As and obtain higher M&A performance.In the context of China’s particular institutional environment,China’s M&A financial advisors need to play both a monitoring role and an advisory role in M&A transactions.As the provider of M&A advisory services,investment bankers not only participate in transaction valuation,plan design but also issue professional opinions and guide related application documents for M&A transactions that have a significant impact on listed companies’ equity structure,asset structure,revenue,and profits,etc.Also,investment bankers need to conduct due diligence on the acquirer and target of M&As,assess the risks of the transaction comprehensively,supervise all the parties to perform obligations according to the law,and issue professional opinions objectively and impartially in accordance with the law with relevant regulations.Based on previous studies,this article mainly discusses the following two research questions.First,will the ‘personal-level’ heterogeneity of investment bankers who participate in M&As affect M&A transactions and performance they participate? Second,how does investment bankers’ heterogeneity affect M&A transactions and performance,in detail,how does investment bankers’ heterogeneity affect the performance of the advisory and monitoring functions of the M&A financial advisor?Using M&A transactions that hired a financial advisor during 2010-2017 as the sample,this study examines the impacts of investment banker heterogeneity,i.e.,human capital and social capital,on listed companies’ M&A transactions and performance.Specifically,this paper examines the impact of the two basic components of the investment bankers’ human capital(educational background and experience)and the two main dimensions of social capital(structural social capital and relational social capital)on M&A transactions and performance.Further,this article examines the influence of the personal characteristics of investment bankers on the advisory function and monitoring function of M&A financial advisors.This paper draws the following conclusions:First,the ‘personal-level’ heterogeneity of the investment bankers will significantly affect the target’s performance commitment,M&A premium,and M&A performance.Specifically,in terms of human capital,this paper finds that the educational attainment of investment bankers can significantly increase targets’ relative performance commitment,increase the completion rate of performance commitment,reduce the M&A premium,and improve M&A performance.The experience of the investment bankers has no significant impact on the target’s relative performance commitment and the completion rate of performance commitments,but it significantly increases M&A premium and reduces M&A performance.In terms of social capital,this paper finds that the structural social capital of the investment bankers can also significantly increase targets’ relative performance commitment,increase the completion rate of performance commitment,reduce the M&A premium,and improve M&A performance.In contrast,the relational social capital of the investment bankers will significantly reduce targets’ relative performance commitment,increase the M&A premium,and have no significant impact on M&A performance.Second,through mechanism analysis,we found that financial advisors in the Chinese M&A market not only perform advisory functions but also play a monitoring role.Specifically,the educational attainment and structural social capital of investment bankers can simultaneously help them better perform the advisory and monitoring functions and thus can help the acquirers to obtain higher target performance commitments and deal performance at lower prices.In contrast,investment bankers’ experience and relational social capital can help them better perform advisory function but impair their monitoring function at the same time.The combined effect of the two mechanisms leads to insignificant relationships between investment bankers’ experience,relational social capital,and M&A performance.This article mainly has the following three contributions: First,this article fills the gaps in the research on the influence of investment bankers’ ‘personal-level’ heterogeneity on M&A transactions and M&A performance.Most of the existing studies on the role of financial advisors in M&A transactions only focus on the ‘company-level’ heterogeneity of advisory banks without in-depth exploration of the impact of the heterogeneity of project participants.From the perspective of the investment bankers,this research explores the impact of investment banker heterogeneity on the functions of financial advisory and its economic consequences,which fills the above research gap to a large extent.Second,this research pioneered the proposal of the monitoring role of M&A financial advisor besides its advisory role.Scholars have discovered that M&A financial advisors can perform advisory functions in M&A transactions,helping the transaction parties to better complete M&A transactions and obtain higher M&A returns.In addition to emphasizing the advisory function of M&A financial advisors,this research proves the monitoring function of financial advisors in M&A transactions and improves the understanding of financial advisors’ functions in existing research.Third,this research constructs a relatively complete measurement system of investment bankers’ ‘personal-level’ heterogeneity through multi-dimensional measurement of their human capital and social capital.Using the two basic components of human capital(educational background and experience)and the two main dimensions of social capital(structural social capital and relational social capital)to measure the personal heterogeneity,this research explores the impacts of investment banker heterogeneity on M&A transactions and economic consequences more comprehensively,which provides a more complete research perspective for related research in the field of financial advisor.