Investment banks as insiders and the market for corporate control

We study holdings in merger and acquisition (M&A) targets by financial conglomerates in which affiliated investment banks advise the bidders. We show that advisors take positions in the targets before M&A announcements. These stakes are positively related to the probability of observing the bid and to the target premium. We argue that this can be explained in terms of advisors who are privy to important information about the deal, investing in the target in the expectation of its price increasing. We document the high profits of this strategy. The advisory stake is positively related to the likelihood of deal completion and to the termination fees. However, these deals are not wealth creating: there is a negative relation between the advisory stake and the viability of the deal. (JEL G23, G32, G34) Investment banks play an important role in the market for corporate control. They advise the bidder and the target, evaluating the assets of the target firm and providing technical and tactical assistance throughout the takeover process. By effectively facilitating the deals and reducing the transaction costs, they can enhance external corporate governance. However, advisory banks are als