Corporate Governance

Study Finds Wall Street Awash In Conflicts and Insider Deals

By Jeremy Lieberman

The Wall Street Journal recently reported that regulators are investigating whether investment banks engaged in insider trading by purchasing large quantities of shares of target companies when acting as advisors to the purchasers on M&A deals.  The investigations were prompted by a new academic study which found that investment banks purchased shares of these target companies prior to the announcement of a deal with much greater frequency than would normally be expected. 

The study, entitled ?The Dark Role of Investment Banks in the Market for Corporate Control?, was conducted by three European finance professors.  It analyzed more than 1,600  U.S.merger deals between 1984 and 2003, along with quarterly 13F filings of institutional investors.  The study found that during the quarter immediately preceding a merger announcement, investment banks serving as lead advisers to acquirers purchased stock or increased their stake in the target company 19% of the time.  That number is nearly double the 10.5% rate for those banks not serving in advisory roles. 

For example, in September 2006, Motorola, Inc. acquired Symbol Technologies, Inc., a maker of bar-code readers and other devices.  The merger discussions began more than a year earlier, in 2005.  Conveniently, Goldman also purchased over a million shares of Symbol in June 2006.  The study lists countless other examples of other banks engaging in such ?fortuitous? trading. 

Andire Siminov, one of the authors of the study concludes that ?the most probable explanation is that banks are trading on inside information.?  David Yermack, a finance professor at NYU sees serious conflicts of interest in such trading.  ?People doing these mergers hire the banks to be their best agent.  But from the data, it seems that banks are doing what is best for themselves.?

The games get dirtier and dirtier on the ?Street?.

Full post as published by PomTalk on January 14, 2008 (boomark / email).