implications and wealth effects of acquisitions by investment bankers

The purpose of this study is to develop and empirically test theories on wealth effects surrounding acquisitions by investment bankers. The primary research objective deals with strong-form market efficiency. The test strives to determine if the results of information held by investment bankers are attributable to inside information or information that is available to anyone willing to research and analyze particular target firms. A second research objective is to examine why larger wealth effects are expected. Potential reasons examined include internal and external governance issues, as well as acquisition activity as a means of governance. Specific issues examined are (1) a change in the chief executive officer after acquisition, (2) a change in the board of directors after acquisition, (3) an increase in the debt ratio of the target firm after acquisition, (4) downsizing and/or exiting from an industry after acquisition, and (5) to stop the selection of poor acquisitions by the target firm. The relative size of the acquisitions is controlled for in both groups; economies of scale realized from horizontal or vertical acquisitions are controlled for in the case of the control group. A comparison of the wealth gains between the two groups reveals that investment bankers outperform non-investment bankers when the average holding period abnormal return is used as the wealth measure. However, when cumulative average abnormal returns are compared, the non-investment banker group realizes higher wealth gains than the investment bankers. In no case does either group outperform a market index, the S&P 500. The results of the wealth effect tests support strong-form market efficiency; investment bankers do not utilize private information to realize gains from closely-held information. Primarily, downsizing is associated with positive effects on the stock price returns of target firms in partial acquisitions by investment bankers. Non-investment banker partial acquisitions are characterized with a change in the chief executive officer of the target firm. This change, however, is negatively associated with the share price returns of the target firms.