The Financial Review

The Wealth Effects of Fairness Opinions in

Journal: The Financial Review

Manuscript ID FIRE-2017-09-137.R2 Manuscript Type:For Paper ReviewSubmitted for Review Only , fairness opinions, bidder abnormal returns, Rule Keywords: 2290

Page 1 of 48 The Financial Review

1 2 3 4 The Wealth Effects of Fairness Opinions in Takeovers 5 6 Tingting Liu* 7 8 9 Creighton University 10 11 12 Abstract 13 14 This paper explores the wealth effects associated with a bidder’s decision to solicit a fairness 15 opinion in a transaction. Using a hand-collected sample with bidders’ filing proxy 16 17 statements, this paper finds that the use of fairness opinions does not negatively affect bidder 18 shareholders’ wealth, a finding that contradicts prior studies’ findings. In addition, I find a 19 positive wealth effect associatedFor withReview bidder use of Only fairness opinions in the post–Rule 2290 20 21 period. Collectively, these results are consistent with a fairness opinion being used by bidder 22 as a means to facilitate transactions rather than a mechanism to entrench 23 management. 24 25 26 JEL Classification: G34, G24, J33 27 28 29 Keywords: mergers and acquisitions, fairness opinions, bidder abnormal returns, Rule 2290 30 31 32 33 34 35 36 37 38 39 *Corresponding author: Assistant Professor, Heider College of Business, Creighton University, 40 Omaha, NE 68178; Phone: (402) 280-4806; E-mail: [email protected]. 41 42 I am particularly grateful to my dissertation chair, Harold Mulherin, as well as Srini 43 Krishnamurthy (the editor), one anonymous reviewer, Chris Anderson, Scott Atkinson, David 44 45 Becher, Seong Byun, Erik Devos, Stuart Gillan, Jack He, Sara Holland, Eric Kelley, Felix 46 Meschke, Jeffry Netter, Bradley Paye, Annette Poulsen, Andy Puckett, Tao Shu, David 47 Offenberg, Micah Officer, Joshua Spizman, Bonnie Van Ness, Oscar Varela, Robert Van Ness, 48 William Vogt, Eddie Wei, Jide Wintoki, Tracie Woidtke, Julie Wu, and conference participants 49 at the 2015 Eastern Association Annual Meetings, the 2013 Financial Management 50 Association Meetings, the 2013 Southern Financial Association Meetings, and seminar 51 participants at the University of Georgia, University of Tennessee, University of Kansas, 52 53 University of Wyoming, University of Mississippi, University of Texas at El Paso, Creighton 54 University, and Loyola Marymount University for comments and suggestions. I am also grateful 55 to WRDS and EFA 2015 for sponsoring and selecting this paper for the Wharton School-WRDS 56 57 58 59 60 The Financial Review Page 2 of 48

1 2 3 Outstanding Paper in Empirical Research. I remain responsible for any remaining errors or 4 omissions. 5 6 1. Introduction 7 8 Public company boards of directors are obligated to fulfill their fiduciary duty in 9 10 important corporate transactions such as mergers and acquisitions (M&As). A central 11 12 question is how equity exchange values are determined in M&As, because the process of 13 14 determining exchange values not only reflects the efforts of boards of directors to 15 perform due diligence but, more importantly, can also significantly affect shareholders’ 16 17 wealth. Seeking a fairness opinion from a financial adviser who evaluates whether the 18 consideration to be paid or received is “fair from a financial point of view” is a common 19 For Review Only 20 practice in M&As. This paper investigates the value effects of fairness opinions sought 21 22 by bidders. 23 24 Conceptually, two discrete—albeit not mutually exclusive—views interpret the 25 potential effects of the use of fairness opinions. One view posits that fairness opinions 26 27 can facilitate transactions because a range of fair prices outlined in the opinions imposes 28 29 impartial, external constraints on equity exchange values (DeAngelo, 1990). The 30 analysis provided in fairness opinions thus mitigates information risks and 31 32 enhances communications between bidder boards of directors and their shareholders. I 33 34 refer to this first hypothesis as the shareholder interest/transaction facilitation hypothesis, 35 which suggests that management acts in the best interests of shareholders and that the use 36 37 of a fairness opinion by management will benefit their shareholders. 38 39 An alternative view suggests that the main motivation for a board of directors to 40 obtain a fairness opinion is to entrench management by mitigating litigation risks when 41 42 management behaves opportunistically at the expense of shareholders. Prior studies show 43 44 that litigation risks as an institutional factor mitigate agency problems, and argue that a 45 reduction in the expected legal liability entrenches management, exacerbates agency 46 47 problems, and encourages managerial opportunism (Burgstahler, Hail, and Leuz, 2006; 48 49 Leuz, Nanda, and Wysocki, 2003). I refer to this second hypothesis as the management 50 interest/entrenchment hypothesis, which predicts a high degree of managerial 51 52 opportunism when a fairness opinion is sought, and that the use of this opinion will result 53 54 in significant shareholder wealth destruction. 55 56 57 58 59 60 Page 3 of 48 The Financial Review

1 2 3 4 Admittedly, the two potential explanations might not be mutually exclusive because 5 boards of directors may have a variety of reasons for obtaining fairness opinions in 6 7 takeover transactions. 8 9 This paper investigates which explanation has the dominant effect by testing market 10 reactions to the use of fairness opinions. If the entrenchment explanation has the 11 12 dominant effect, then market reactions to the use of fairness opinions should be 13 14 significantly negative. In contrast, if the transaction facilitation view dominates, then 15 market reactions should be either non-negative or positive. 16 17 Existing empirical evidence on the use of fairness opinions by bidder management 18 19 largely favors the entrenchmentFor Review view. Table 1, PanelOnly A summarizes prior studies that 20 examine the wealth effects of fairness opinions obtained by bidders. The use of fairness 21 22 opinions by bidders has consistently been found to be significantly negatively associated 23 24 with bidder abnormal returns around merger announcements. Prior studies interpret this 25 26 negative association as being consistent with the entrenchment hypothesis (e.g., Kisgen, 27 Qian, and Song, 2009). In this paper, I provide new empirical evidence suggesting that 28 29 the use of fairness opinions does not have a negative impact on shareholders’ wealth. The 30 31 negative association between fairness opinions and bidder announcement returns 32 documented in prior studies is likely due to a severe sample selection bias. 33 34 I start by identifying a sample that requires a bidder shareholder vote. This sample 35 36 criterion is crucial, as pointed out by Cain and Denis (2013), who note that the use of 37 fairness opinions is disclosed only if bidders are required to file proxy statements to 38 39 solicit a shareholder vote. Listing rules of the NYSE, AMEX, and NASDAQ require a 40 41 bidder shareholder vote only when the bidder plans to issue 20% or more new equity to 42 finance a deal. In other words, as long as the bidder uses cash or issues less than 20% 43 44 new equity, a bidder shareholder vote is not required; neither is the disclosure of a 45 46 fairness opinion (even if the bidder obtained such an opinion in the transaction). A major 47 limitation of existing studies that examine abnormal returns associated with whether or 48 49 not a bidder obtained a fairness opinion is that the authors assume no fairness opinion 50 51 was used if none was observed. This assumption is very strong, as pointed out by Ferro, 52 Messina, and Benoit (2015), who suggest that a bidder might seek a fairness opinion in 53 54 larger transactions—even when those transactions are financed by cash—to help fulfill 55 56 the fiduciary obligation due to the amount of cash required. In these cases, fairness 57 58 2 59 60 The Financial Review Page 4 of 48

1 2 3 4 opinions are used but not observable. On the other hand, if we do not observe a fairness 5 opinion disclosed in a proxy statement, then we can safely conclude that the bidder did 6 7 not obtain such an opinion, because the proxy rule requires the disclosure of all material 8 9 information, including the details of fairness opinions. 10 After identifying a sample of deals requiring a bidder shareholder vote, I manually 11 12 collect the information on the number of fairness opinions obtained by bidders from the 13 14 proxy statements through the SEC EDGAR website. Consistent with Kisgen, Qian, and 15 Song (2009), who point out that the fairness opinion data provided by the Securities Data 16 17 Corporation (SDC) are inaccurate, I find that SDC underreports the use of fairness 18 19 opinions by bidders, especiallyFor Reviewin the early sample period.Only 20 To test which hypothesis has the dominant effect, I examine how the use of fairness 21 22 opinions affects bidder abnormal returns around merger announcements. The ordinary 23 24 least squares (OLS) regression results suggest that the use of fairness opinions does not 25 26 have a significantly negative impact on shareholders’ wealth after controlling for main 27 deal and firm characteristics. I recognize the potential endogenous nature of the decision 28 29 to seek fairness opinions and employ three methods to address the nonrandom nature of 30 31 obtaining fairness opinions: a two-stage least squares regression (2SLS) analysis, a 32 propensity matching analysis, and a direct matching analysis. After I have controlled for 33 34 potential endogeneity issues, results continue to suggest that the use of fairness opinions 35 36 does not destroy shareholders’ wealth. 37 To further explore which hypothesis is the dominant hypothesis, I investigate whether 38 39 Rule 2290, which was designed to mitigate conflicts of interest, has a significant impact 40 41 on fairness opinions. The principal criticism regarding fairness opinions is that conflicts 42 of interest could arise under two different scenarios. First, a fairness opinion is usually 43 44 rendered by the same financial adviser who arranges the merger and charges fees 45 46 contingent on deal completion. Second, if a financial adviser has had a prior business 47 relation with the management, this adviser may have an incentive to agree with 48 49 management’s assessment of a transaction. To address these conflicts of interest, in 50 51 October 2007, the SEC approved Rule 2290, which regulates the identification and 52 disclosure of conflicts of interest of investment banks rendering fairness opinions. My 53 54 sample includes years in both the pre– and post–Rule 2290 periods, thus enabling exami- 55 56 nation of the effects of Rule 2290. The shareholder interest/transaction facilitation 57 58 3 59 60 Page 5 of 48 The Financial Review

1 2 3 4 hypothesis predicts a positive effect of obtaining a fairness opinion in the post–Rule 2290 5 period because the quality of such an opinion increases in this period due to increased 6 7 disclosure requirements and enhanced procedures of using a fairness committee. The 8 9 entrenchment hypothesis suggests that in the post–Rule 2290 period, the entrenchment 10 may be less likely to be at work and hence returns would be less negative or statistically 11 12 insignificant. 13 14 I find that the use of fairness opinions is positively related to both bidder abnormal 15 returns and post-merger operating performance in the post–Rule 2290 period. These 16 17 results are consistent with the shareholder interest hypothesis and are inconsistent with 18 19 the entrenchment hypothesis.For TheReview novel evidence Only of positive wealth effects associated 20 with fairness opinions in the post-rule period suggests that the new rule is having its 21 22 intended effect, and that further requirements suggested by some commentators, such as 23 24 prohibiting investment banks with prior business relations with the firm from providing 25 26 fairness opinions, may be unnecessary. 27 This study builds on Cain and Denis’s (2013) investigation of the incremental 28 29 information of fairness opinions conditioned on the use of such opinions over the period 30 31 1998–2005. Cain and Denis (2013) test whether price reactions to merger 32 announcements are positively associated with the fairness opinion valuation and find that 33 34 the fairness opinion valuation provided by target advisers, but not acquirer advisers, is 35 1 36 informative. My analysis extends Cain and Denis’s (2013) study by investigating bidder 37 shareholders’ wealth associated with the decision of whether or not to obtain a fairness 38 39 opinion. More importantly, the novel evidence of favorable stock price reaction to bidder 40 41 use of fairness opinions in the post–Rule 2290 period suggests that the market views 42 fairness opinions rendered by bidder advisers as informative. Prior studies that examine 43 44 shareholders’ wealth associated with a bidder’s decision to seek a fairness opinion such 45 46 as Kisgen, Qian, and Song (2009), Chen and Sami (2007), and Frye and Wang (2010) 47 consistently find a significantly negative relation between the use of fairness opinions and 48 49 bidder announcement returns.2 In contrast, I find no evidence that the use of fairness 50 51 1 Fairness opinion valuation is defined as the percentage difference between the advisers’ valuation and the 52 initial offer price at the merger announcement date. 53 2 Several prior studies examine the determinants of obtaining fairness opinions by bidders (e.g., Bowers 54 and Latham, 2006; Kisgen, Qian, and Song, 2009). In untabulated results, I find that conditioning on firms 55 issuing proxy statements, the decision to obtain fairness opinions by bidders is negatively related to all- 56 stock payment, , bidder prior year returns, and CEO ownership. The fair opinion decision is 57 58 4 59 60 The Financial Review Page 6 of 48

1 2 3 4 opinions has a negative impact on shareholders’ wealth after addressing sample selection 5 bias, suggesting that the decision to seek a fairness opinion is not de facto evidence that 6 7 bidder management is engaging in rent seeking at the expense of shareholders. 8 9 The remainder of the paper proceeds as follows. Section 2 describes the use of 10 fairness opinions, related literature, and the hypotheses. Section 3 presents the sample. 11 12 Section 4 performs main empirical analysis. Section 5 concludes. 13 14 15 16 2. The use of fairness opinions, prior research, and hypotheses development 17 18 2.1 Shareholder approval and disclosure of fairness opinions in M&As 19 For Review Only 20 21 The SEC requires firms publicly listed on U.S. stock exchanges to disclose all 22 material information when they issue proxy statements soliciting shareholder votes, and 23 24 the SEC considers fairness opinion valuations to be material information.3 On the target 25 4 26 side, almost all mergers require a shareholder vote from target shareholders. However, 27 28 as discussed in the Introduction, the same is not true on the bidder side. Unlike in the 29 United Kingdom where a bidder shareholder vote in large deals is mandatory, in the 30 31 United States there are no direct rules requiring a bidder shareholder vote in takeover 32 33 transactions. Instead, listing rules of the NYSE, AMEX, and NASDAQ require a bidder 34 shareholder vote only when the bidder plans to issue 20% or more new equity to finance 35 36 a deal. Appendix B provides additional information about the shareholder approval 37 38 policy. 39 These different voting requirements for target and bidder shareholders have important 40 41 implications when we study fairness opinions sought by targets or bidders. Target-side 42 43 fairness opinions are always observable because they are always disclosed in the proxy 44 statements. However, bidder-side fairness opinions are observed only when bidders issue 45 46 at least 20% new equity and file proxy statements. In other words, if the bidder issues less 47 48 than 20% equity or uses cash to finance the deal, a shareholder vote would not be 49 50 positively related to bidder size, target being a public firm, percentage of shares issued in the transaction, 51 and board independence. 52 3 SEC 13e-3 states the disclosure requirement for going-private transactions and SEC proxy rules set 53 requirements for proxy statement files in corporate transactions. 54 4 For tender offers where the target shareholders do not vote, the target firm is required to file SC14D9 and 55 to make a recommendation statement to their shareholders with respect to the tender offer, which is 56 pursuant to Section 14(d)(4) of the 1934 Securities Exchange Act. 57 58 5 59 60 Page 7 of 48 The Financial Review

1 2 3 4 mandated and the bidder would not be required to disclose the fairness opinion even if 5 the firm had obtained one. 6 7 Existing studies on bidder use of fairness opinions seldom recognize the requirement 8 9 of shareholder approval of equity issuance, even as such approval is central to the 10 question at hand. For example, Kisgen, Qian, and Song (2009), Chen and Sami (2006), 11 12 Frye and Wang (2010), Makhija and Narayanan (2007), and Bowers and Latham (2006) 13 14 do not divide their samples into those mergers that require a bidder shareholder vote and 15 those that do not. These studies simply assume that there are no fairness opinions for 16 17 bidders who are not required to disclose them. Table 1, Panel A shows the percentage of 18 19 bidder fairness opinionsFor and associatedReview bidder announcement Only returns reported in prior 20 studies that did not distinguish mergers requiring a bidder shareholder vote from those 21 22 that did not. The percentage of bidder use of fairness opinions in these studies ranges 23 24 from 9% to 37%. In addition, these studies consistently find significantly lower abnormal 25 5 26 returns associated with bidder use of fairness opinions, ranging from –0.6% to –3.9%. 27 One exception is Cain and Denis (2013), who examine bidders’ price reaction to 28 29 fairness opinions’ valuation premium (defined as the difference between the value in the 30 31 opinion and the offer price) conditioned on the disclosure of fairness opinions. The 32 authors carefully construct and discuss their sample selection. The authors state, “The 33 34 fact that acquirers are not always required to disclose the presence of fairness opinions 35 36 (even if they are obtained) imparts a potentially serious sample selection bias to studies in 37 which a key variable is an indicator denoting whether or not acquirers or targets obtain a 38 39 fairness opinion supporting the transaction. For example, since a proxy solicitation is 40 41 required only when at least 20 percent new equity is issued, it is likely that the set of 42 mergers in which acquirer-side fairness opinions is observed represents transactions of 43 44 larger size relative to the acquirer. If the short-run or long-run market performance of 45 46 acquirers of relatively large targets differs from that of acquirers of small targets, studies 47 might falsely attribute the performance difference to the observed fairness opinion” (Cain 48 49 and Denis, 2013, p. 253). Indeed, the authors report that 83% of the time, bidders obtain 50 51 fairness opinions when a merger is conditioned on a bidder shareholder vote. Not 52 53 5 Consistent with prior studies, when using a sample that does not require firms filing proxy statements, I 54 find a significantly negative relation between bidder announcement returns and the use of fairness opinions. 55 Specifically, the use of fairness opinion is associated with a significantly lower bidder announcement return 56 of 2.3% after controlling for firm and deal characteristics. 57 58 6 59 60 The Financial Review Page 8 of 48

1 2 3 4 surprisingly, the percentage of bidders obtaining fairness opinions conditioned on a 5 shareholder vote is significantly higher than that reported in other studies that have not 6 7 taken such conditioning into account. 8 9 Although prior studies attempt to investigate the wealth effects of fairness opinions 10 sought by bidders, most studies suffer from sample selection bias as described above. 11 12 Cain and Denis (2013) directly investigate the incremental information of fairness 13 14 opinions conditioned on the disclosure of fairness opinions; thus, they do not address the 15 wealth implication of the decision to seek a fairness opinion. The current paper seeks to 16 17 answer this question by examining deals that issue at least 20% new equity and thus 18 19 require a bidder shareholderFor vote. Review Only 20 The proxy rules require bidders to file a proxy statement and disclose the use of 21 22 fairness opinions if a deal requires a bidder shareholder vote. Thus, if no fairness 23 24 opinions are disclosed in the proxy statement addressed to bidder shareholders, then the 25 26 bidder indeed has not obtained such an opinion. Occasionally, firms discuss why they did 27 not obtain a fairness opinion in the proxy filing. For example, the proxy statement filed 28 29 by Handheld Entertainment, Inc. (the bidder) in August 2007 stated, “We did not seek or 30 31 obtain a fairness opinion with respect to the purchase price to be paid to eBaum’s World 32 (the target), relying instead on the experience and judgment of our management and 33 34 directors.” In the majority of cases, we do observe that bidders sought fairness opinions 35 36 in deals requiring a bidder shareholder vote. Appendix C provides an example of a bidder 37 issuing more than 20% new equity and utilizing fairness opinions to solicit shareholder 38 39 votes. 40 41 Figure 1 provides a typical time line of a merger negotiation process and the use of 42 fairness opinions. As noted in Boone and Mulherin (2007) and Liu and Mulherin (2018), 43 44 merger negotiation usually starts several months or even more than a year prior to the 45 46 formal merger announcement. The example presented in Figure 1 illustrates the deal 47 process between Baker Hughes (the bidder) and BJ Services (the target). The bidder 48 49 initiated the deal in July 2008 and retained Goldman Sachs as its financial adviser in 50 51 August 2008. After several rounds of merger negotiation, Goldman Sachs provided a 52 preliminary financial analysis regarding the potential transaction in July 2009 and 53 54 rendered a formal fairness opinion in August 2009, right before the merger 55 56 announcement. It is worth noting that fairness opinions are usually obtained once the 57 58 7 59 60 Page 9 of 48 The Financial Review

1 2 3 4 terms of consideration have been finalized during the private negotiation process, which 5 is prior to the public merger announcement. 6 7 8 2.2 Hypotheses development and empirical predictions 9 10 11 Two main hypotheses potentially explain the use of fairness opinions: the 12 management interest/entrenchment hypothesis and the shareholder interest/transaction 13 14 facilitation hypothesis. The hypothesis argues that managers 15 16 obtain fairness opinions to provide legal protection against shareholder litigation when 17 management engages in value-destroying transactions. In contrast, the shareholder 18 19 interest/transaction facilitationFor Review hypothesis argues Only that fairness opinions are used to 20 21 facilitate transactions and are in the best interests of shareholders as opposed to 22 managers. 23 24 25 2.2.1 The management interest/entrenchment hypothesis 26 27 28 The basis for the management entrenchment hypothesis can be traced to the concept 29 of the separation of ownership and control emphasized by Berle and Means (1932). 30 31 Because officers and directors of major corporations often do not hold a large fraction of 32 33 company stock, these agents do not necessarily have an incentive to act in the interest of 34 shareholders. Similarly, Jensen and Meckling (1976) argue that because the relationship 35 36 between shareholders and the manager of a corporation fits into a pure agency 37 38 relationship, we should expect to see that issues associated with the separation of 39 ownership and control are also associated with the general problem of agency. The 40 41 entrenchment hypothesis argues that fairness opinions reduce monitoring of litigation, 42 43 because such opinions give directors a defense in situations in which they have behaved 44 opportunistically. 45 46 Existing studies show that litigation risk as an institutional factor mitigates agency 47 48 problems (Leuz, Nanda, and Wysocki, 2003; Burgstahler, Hail, and Leuz, 2006). Because 49 potential litigation risk provides an effective constraint on management and reduces 50 51 opportunistic behavior, a reduction in the expected legal liability of managers exacerbates 52 53 agency problems and undermines the deterrent effect of litigation. Chalmers, Dann, and 54 Harford (2002) and Chung and Wynn (2008) suggest that firms with high liability 55 56 57 58 8 59 60 The Financial Review Page 10 of 48

1 2 3 4 insurance coverage tend to engage in high levels of managerial opportunism. Lin, 5 Officer, and Zou (2011) examine the effect of directors’ and officers’ liability insurance 6 7 on merger outcomes and find that the provision of liability insurance induces unintended 8 9 moral hazard by shielding directors and officers from the discipline of shareholder 10 litigation. 11 12 The entrenchment hypothesis thus predicts that management will obtain a fairness 13 14 opinion to remove legal risks in transactions that will create no value to shareholders but 15 will benefit management. For example, if the bidder overpays a target in an empire- 16 17 building activity, the bidder may seek a fairness opinion to certify the price paid in case 18 19 of a lawsuit. In the meantime,For investmentReview banks arguably Only have strong incentives to rubber 20 stamp whatever equity values managers select by manipulating financial models to 21 22 generate numbers that rationalize managers’ chosen values to the courts. This argument is 23 24 based on the observation that a fairness opinion is usually rendered by the same financial 25 6 26 adviser who arranges the merger and charges fees contingent on deal completion. 27 Under the entrenchment hypothesis, reducing litigation risk via fairness opinions 28 29 exacerbates agency problems and encourages managerial opportunism at the expense of 30 7 31 shareholders. In addition, obtaining a fairness opinion is costly. Thus, the entrenchment 32 hypothesis predicts that the use of fairness opinions by bidder management destroys 33 34 bidder shareholders’ wealth. The above discussions lead to the following prediction: 35 36 H1: If the management interest hypothesis has the dominant effect, market reactions to 37 38 the use of fairness opinions should be significantly negative. 39 40 41 2.2.2 The shareholder interest/transaction facilitation hypothesis 42 43 In contrast to the entrenchment hypothesis, the shareholder interest/transaction 44 45 facilitation hypothesis argues that fairness opinions are obtained to facilitate a transaction 46 by resolving disagreements among different parties and providing boards with the 47 48 latitude necessary for making decisions in takeover transactions. DeAngelo (1990) 49 50 6 See, e.g., Bebchuk and Kahan (1989), Elson (1992), Elson, Rosenbloom, and Chapman (2003), Oesterle 51 (1992), and Davidoff (2006). 52 7 The direct cash cost of one fairness opinion ranges from several hundred thousand to a few million 53 dollars. Cain and Denis (2013) show that on average, it costs $1 million for bidders to obtain one fairness 54 opinion. The indirect cost can be even higher. For example, the process of producing a fairness opinion 55 involves significant interaction between the adviser and the firm, which takes a considerable amount of 56 management time and effort. 57 58 9 59 60 Page 11 of 48 The Financial Review

1 2 3 4 develops a model showing that a target’s stock price is an inadequate measure of its 5 acquisition value, and the inability to rely on capital markets to value a transaction 6 7 generates disagreement among shareholders, or between shareholders and management. 8 9 She argues that if stockholders’ cooperation is required to effect the transaction, such 10 disagreement can potentially derail a transaction even if the transaction would have been 11 12 value increasing. 13 14 DeAngelo (1986, 1990) presents evidence that the terms of consideration in a 15 takeover transaction are evaluated by investment banks in fairness opinions that were 16 17 based predominantly on accounting information. She further argues that the failure of 18 19 market prices to perfectlyFor reveal Review acquisition values Only makes that accounting numbers 20 become important valuation substitutes. She hypothesizes that by imposing impartial, 21 22 external constraints on equity exchange values, an independent valuation helps ensure 23 24 these values are perceived as “fair” by the outside stockholders, thus securing their votes; 25 26 this process facilitates transactions that will increase overall firm values. As discussed in 27 the Introduction and in Section 2.1., shareholders’ cooperation is required when the 28 29 bidder issues 20% or more new equity to finance a deal. A fairness opinion can secure 30 31 shareholders’ cooperation, resulting in the votes necessary for new equity issuance. 32 In addition to resolving disagreements, fairness opinions may also help directors 33 34 make optimal decisions when they face high litigation risks. This argument is similar to 35 36 that made for the business judgment rule. The business judgment rule is designed to 37 protect directors and make it difficult to hold them liable for their business decisions as 38 39 long as they act on an informed basis and in good faith.8 The rationale behind the 40 41 business judgment rule is that fear of personal liability might cause corporate managers to 42 be overly cautious; as a result, managers might make decisions that minimize litigation 43 44 risks but do not necessarily maximize shareholders’ wealth. As noted earlier, fairness 45 46 opinions can potentially provide boards with the latitude necessary for takeover 47 transactions by bestowing protections equivalent to the business judgment rule to their 48 49 actions (Davidoff, 2006).9 50 51 52 8 Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). 53 9This argument is also similar to Bamber, Jiang, Petroni, and Wang’s (2010) hypotheses that a CEO’s job 54 could benefit either the manager or the shareholders. The management interest/entrenchment 55 hypothesis predicts that a CEO’s job security enables the CEO to take value-decreasing actions, thus 56 destroying shareholders’ wealth. However, an alternative hypothesis, the shareholder interest hypothesis, 57 58 10 59 60 The Financial Review Page 12 of 48

1 2 3 4 The transaction facilitation hypothesis is less concerned than the entrenchment 5 hypothesis about agency problems arising from the separation of ownership and control. 6 7 As Fama (1980) argues, managerial incentive problems attributed to the separation of 8 9 security ownership and control are resolved because managers care about the value of 10 their human capital. In addition, investment bankers are experts in evaluating deals and 11 12 have economic incentives to maintain their reputations for independence and quality 13 14 work. The economic benefits of an excellent reputation give investment bankers 15 incentives to avoid rubber stamp approvals of managerial representations (DeAngelo, 16 17 1981, 1990). The transaction facilitation hypothesis predicts the following: 18 19 For Review Only 20 21 H2: If the shareholder interest hypothesis has the dominant effect, market reactions to the 22 use of fairness opinions should be nonnegative/positive. 23 24 25 26 Although both hypotheses suggest that a board of directors might seek a fairness 27 opinion in situations in which litigation risk is high, it is important to note that the 28 29 motivations and consequences of such a decision are quite distinct under each of the 30 31 hypotheses. The entrenchment hypothesis assumes that because of agency problems, 32 managers will behave more opportunistically when the monitoring effect of litigation is 33 34 reduced, resulting in a negative wealth effect to shareholders. In contrast, the transaction 35 36 facilitation hypothesis assumes that managers are well informed and will act in 37 shareholders’ best interests. Under this latter hypothesis, given that obtaining a fairness 38 39 opinion will add additional costs to a transaction, management will decide to obtain such 40 41 an opinion only if the expected benefits will outweigh the costs, resulting in a non- 42 negative or positive wealth effect for shareholders. 43 44 45 46 3. Sample formation and overview 47 48 49 The sample is based on selection procedures detailed in Li, Liu, and Wu (2016). The 50 initial sample was obtained from the Thomson One Banker SDC database over the period 51 52 1995–2015. The sample in Li, Liu, and Wu (2016) has 5,337 observations after imposing 53 54 55 argues that a CEO’s job security can also benefit shareholders by allowing the CEO to take a long-term 56 view of the firm. 57 58 11 59 60 Page 13 of 48 The Financial Review

1 2 3 4 standard sample filters, such as requiring bidders to be publicly traded and seeking to buy 5 a majority of the target shares. For each of the 5,337 observations, Li, Liu, and Wu 6 7 (2016) manually verify whether bidder shareholder approval is required by searching 8 10 9 SEC filings and find 1,359 deals requiring a shareholder vote. For those deals requiring 10 a shareholder vote, I further require that their proxy statements be available on the SEC 11 12 EDGAR website, so I can obtain information on fairness opinions, thereby avoid the 13 14 sample selection bias discussed in Section 2.1. The final sample included in this study has 15 1,211 observations. Table 2 details the steps of the sample formation. 16 17 Kisgen, Qian, and Song (2009) point out that fairness opinion data provided by the 18 19 SDC are inaccurate. For To ensure Review accuracy, for each Only observation included in the final 20 sample I manually collect the information on the number of fairness opinions obtained by 21 22 bidders and opinion advisers by reading their proxy statements. Table 3 presents the 23 24 temporal distribution of the sample and the percentage of bidders who obtained fairness 25 26 opinions using data from the SDC versus data hand-collected from the proxy statements. 27 The last column of Table 3 and Figure 2 compares bidder use of fairness opinions as 28 29 reported by the SDC and the proxy statements. I observe that in the pre-2001 period, 30 31 more deals required a bidder shareholder vote relative to the post-2001 period. Over the 32 period 1995–2015, when I rely on hand-collected data from the proxy statements, I 33 34 observe that 85% of bidders obtained fairness opinions, which is similar to the fraction 35 36 reported in Cain and Denis (2013). However, if I rely on data reported by the SDC, I 37 observe that only 52% of bidders obtained fairness opinions. Figure 2 confirms that the 38 39 SDC tends to underreport the use of fairness opinions by bidders, especially in the earlier 40 11 41 years of this period. 42 Table 4, Panel A presents summary statistics for the full sample. All variables are 43 44 defined in Appendix A. The average size of the deal in the sample is approximately $2.1 45 46 billion, although this number is considerably skewed as the median deal size is much 47 smaller. Approximately 67% of bidders use all stock to finance a deal; 33% of bidders 48 49 use both cash and stock. Only 1% of the sample has tender offers, which is not surprising 50 51 because the majority of tender offers is financed by cash and thus would be excluded 52 53 10 Those filings include S-4, 8-K, S-4/A, DEFM 14, DEFM 14/A, DEF 14A, DEFS14A, PRES14A, 54 PRER14A, 425, 10-K, and 10-Q. 55 11 Kisgen, Qian, and Song (2009), Cain and Denis (2013), and Liu (2017) also report that the SDC 56 significantly underreports the use of fairness opinions by targets. 57 58 12 59 60 The Financial Review Page 14 of 48

1 2 3 4 from the sample. About 72% of targets are publicly traded firms, and on average, bidders 5 issue 50% of new shares to finance a deal. 6 7 Table 4, Panel B presents analogous statistics for deals in which bidders obtain 8 9 fairness deals versus deals in which they do not. Results show that deals in which bidders 10 obtain fairness opinions are on average significantly larger and have lower prior year 11 12 returns than deals without fairness opinions. No difference is observed in terms of cash 13 14 holdings between these two groups. Deals with fairness opinions are also less likely to be 15 a diversifying deal, a tender offer, or withdrawn. Those deals are more likely to involve 16 17 buying a public target and issuing more shares compared to the non–fairness opinion 18 19 group. Overall, theseFor summary Review statistics indicate Only that when we study wealth effects 20 associated with bidder use of fairness opinions, controlling for firm and deal 21 22 characteristics, because of the observed systematic differences between the two 23 24 subsamples, is essential. 25 26 27 4. Empirical analyses 28 29 30 To understand how fairness opinions impact shareholders’ wealth, I examine bidder 31 32 announcement abnormal returns to shed light on the value implications associated with 33 fairness opinions. I first apply a standard event study methodology, followed by 34 35 multivariate regression analysis. I then employ a two-stage IV approach and two 36 37 matching methods to address potential endogeneity issues. Finally, I investigate the 38 impact of NASD Rule 2290 on fairness opinions. 39 40 41 4.1 The event study and OLS regressions 42 43 44 Following Fuller, Netter, and Stegemoller (2002) and Masulis, Wang, and Xie (2007), 45 I define bidder CARs (–2, +2) as the cumulative net of market returns over the event 46 47 window (–2, +2), where day 0 is the merger announcement date and the market return is 48 12 49 the CRSP value-weighted index. 50 51 12 Note that although the information in a fairness opinion is not disclosed until the proxy statement is 52 available, under the assumption of rational expectation, bidders’ abnormal returns at the time of a public 53 merger announcement should reflect the market’s expectation of that merger on bidders’ shareholder 54 wealth. If deals with fairness opinions are significantly more likely to be value destroying (i.e., under the 55 entrenchment hypothesis), then we should expect a negative relation between the stock price reaction and 56 the use of fairness opinions around the merger announcement as long as we assume that, on average, the 57 58 13 59 60 Page 15 of 48 The Financial Review

1 2 3 4 Table 5, Panel A reports the event study results. Over the sample period 1995–2015, 5 the average five-day CAR is indifferent from zero for deals requiring a bidder 6 7 shareholder vote. When the sample is partitioned into subsamples based on the target’s 8 9 public status, I observe a sharp contrast between public and private targets: abnormal 10 returns are significantly negative for bidders issuing 20% or more equity to buy public 11 12 targets (mean = –2.9%, t-value = –8.14), whereas abnormal returns are significantly 13 14 positive for bidders buying private targets (mean = 7.1%, t-value = 6.40). These results 15 are consistent with prior studies that document negative returns experienced by bidders 16 17 paying stock to buy public targets, but positive returns by those paying stock to buy 18 13 19 private targets. TheFor large return Review difference indicates Only the importance of controlling for 20 the target’s public status when we examine the impact of fairness opinions on bidder 21 22 returns. 23 24 When the sample is partitioned into subsamples based on the use of fairness opinions, 25 26 the last two rows of Panel A report that the group without fairness opinions appears to 27 have significantly positive returns (mean = 2.1%, t-value = 2.04), while the group with 28 29 fairness opinions experiences significantly negative returns (mean = –0.8%, t-value = – 30 31 2.08). This result is confirmed in the univariate regression in model (1) of Panel B. The 32 independent variable in the regression analysis is fairness opinions (FO), a dummy 33 34 variable that equals one if the bidder obtains at least one fairness opinion, and zero 35 36 otherwise. For estimation methods, I follow Petersen (2009) and Harford, Mansi, and 37 Maxwell (2008) and report t-statistics for the pooled results using standard errors 38 39 corrected for clustering at the firm level. Model (1) shows that if we do not control for 40 41 deal and firm characteristics, abnormal returns to deals with fairness opinions are 42 significantly lower compared to deals without fairness opinions. Model (2), however, 43 44 reports no statistical difference of abnormal returns between the groups with and without 45 46 fairness opinions as soon as we control for bidder size, relative size, and target public 47 status. Models (3) and (4) confirm the finding of an insignificant coefficient of FO when 48 49 additional control variables and fixed industry effects are included. 50 51 52 53 market is efficient in assessing a deal’s quality at the time a merger is announced. Under the shareholder 54 interest hypothesis that predicts that fairness opinions are used to facilitate transactions, we should expect a 55 non-negative/positive relation between fairness opinions and bidder shareholders’ wealth. 56 13 For example, see Chang (1998), Officer (2007), and Officer, Poulsen, and Stegemoller (2009). 57 58 14 59 60 The Financial Review Page 16 of 48

1 2 3 4 In addition to the target’s public status, bidder size and the amount of cash holdings 5 are also negatively correlated with bidder announcement returns, consistent with prior 6 7 studies (e.g., Harford, 1999; Moeller, Schlingemann, and Stulz, 2004). The results 8 9 reported in Table 5, Panel B contrast with the findings of significantly negative impacts 10 of fairness opinions on bidder returns reported in prior studies, as illustrated in Table 1. 11 12 The results also confirm the concern (Cain and Denis, 2013) that in studies not 13 14 conditioned on the disclosure of fairness opinions, the performance difference might be 15 falsely attributed to the observed fairness opinions, when in fact the difference is likely 16 17 due to systematic differences in deal/firm characteristics between those deals that require 18 19 a shareholder vote versusFor those Review that do not. The evidenceOnly provided in Table 5 is mainly 20 consistent with the transaction facilitation hypothesis and is inconsistent with the 21 22 entrenchment hypothesis, because the use of fairness opinions does not harm 23 14 24 shareholders’ wealth. 25 26 27 4.2 Controlling for endogeneity: Twostage regressions 28 29 Admittedly, the use of a fairness opinion is endogenously determined by bidder 30 31 management. There could be unobservable factors that affect the fairness opinion 32 33 decision and also are correlated with bidder announcement returns. In this section, I 34 employ a 2SLS approach to alleviate the endogeneity issue and provide additional 35 36 supporting evidence. 37 38 Two-stage regressions require a valid instrumental variable that satisfies both 39 relevance and exclusion restrictions. The instrumental variable must be correlated with 40 41 the endogenous regressor (use of a fairness opinion) but uncorrelated with the error in the 42 43 structural equation, because the instrumental variable affects the outcome variable 44 (bidder announcement returns) only through its effect on the choice variable (use of a 45 46 fairness opinion). 47 48 My instrument for the use of a fairness opinion is a bidder location indicator that 49 equals one if the bidder is located in one of the following three states: California, New 50 51 York, or Massachusetts. This variable is motivated by findings in Coates (2001) that 52 53 54 14 In untabulated analyses, I find that whether fairness opinions are provided by top advisers does not 55 significantly affect deal outcomes. The findings are consistent with Song, Wei, and Zhou (2012), who 56 suggest that smaller boutique advisers’ expertise also adds value to the valuation process. 57 58 15 59 60 Page 17 of 48 The Financial Review

1 2 3 4 show law firms as highly geographically concentrated in these three states and that most 5 law firms are located in the same state as the company they advise.15 Coates (2001, p. 6 7 1339) argues that “Geographically proximate law firms will tend to think of other local 8 9 firms as their most dangerous competitors, and thus be more interested in keeping up 10 with what the others are doing. The result is that (perceived) best practices will be more 11 12 readily copied within geographic localities.” This argument implies that law firms located 13 14 in these three states face higher competition and thus would be more likely to advise 15 management to obtain a fairness opinion because of its potential to reduce litigation risks. 16 17 Given that most law firms advise a company located in the same state, I expect that 18 19 bidders located in oneFor of the three Review states with highly Only concentrated law firms will be more 20 likely to obtain a fairness opinion because of their legal advisers’ recommendation. This 21 22 positive relation satisfies the relevance restriction. Meanwhile, the exclusion restriction is 23 24 also likely to be satisfied because law firms’ geographic influences on firms’ use of 25 16 26 fairness opinions will likely not be directly related to firm or deal fundamentals. I 27 further include industry effects in the regressions to control for any potential concerns 28 29 that certain industries may be geographically concentrated. 30 31 Table 6 presents the results of 2SLS regressions. Model (1) reports the univariate 32 regression of the use of FO on the instrumental variable. As expected, there is a 33 34 significantly positive relation between the use of fairness opinions by bidders and the 35 36 instrument. Model (2) reports the first-stage regression results. The coefficient of the 37 instrument remains positive and statistically significant at the 1% level when additional 38 39 control variables are included. The Stock and Yogo (2005) tests reject the null hypothesis 40 41 that the instrument is weak, as the F-test value of the first-stage regression is well above 42 the critical values. Model (3) reports the second-stage regressions of bidder 43 44 announcement returns on the instrumented FO. The second-stage results again suggest 45 46 that the use of fairness opinions has a non-negative impact on shareholders’ wealth. 47 48 49 4.3 Controlling for endogeneity: Matching analyses 50 51 52 15 Coates (2001) shows that over 60% of the law firms in his sample are located in those three states, and 53 about 58% of the law firms are located in the same state as the company they advise. 54 16 Similarly, Johnson, Karpoff, and Yi (2015) argue that geographic influences on firms’ use of takeover 55 defenses are not directly related to the firm’s fundamentals and use a firm location indicator to instrument 56 the use of takeover defenses. 57 58 16 59 60 The Financial Review Page 18 of 48

1 2 3 4 As an alternative to 2SLS estimation, whose validity hinges on the validity of the 5 instrument variable, I also use two matching methods to shed light on the effect of 6 7 fairness opinions on bidder announcement returns: propensity score matching and direct 8 9 matching. The advantage of these methods is that they are transparent, easy to 10 understand, and intuitive; their disadvantage is that they do not handle the issue of 11 12 selection on unobservables. 13 14 To conduct propensity score matching, I first use the full regression specification in 15 Table 5 to estimate a propensity score, which is the probability that a given bidder will 16 17 obtain a fairness opinion. I then match the fairness opinion firm with a non-opinion firm 18 19 using the nearest neighborFor method Review with replacement. Only 20 The results of propensity score matching are reported in Table 7, Panel A. The 21 22 second row, labeled “Matched,” compares fairness opinion firms to their counterparts 23 24 based on the nearest matched non-opinion firms. The results show a comparable wealth 25 26 effect between these two groups after matching. 27 In addition to propensity score matching, I employ a direct matching method to 28 29 explicitly match the two groups on important aspects that affect both the decision to seek 30 31 fairness opinions and announcement returns. Given that only 178 deals did not have 32 fairness opinions on the bidder side and 1,033 deals did, I match each bidder that did not 33 34 obtain a fairness opinion (i.e., FO = 0) with a bidder that did (i.e., FO = 1) explicitly 35 36 based on the following criteria: (1) both bidders are from the same industry, (2) both 37 bidders use the same method of payment (i.e., all stock or mixed), (3) the type of target 38 39 being acquired is the same (i.e., a public or private target), and (4) bidder size with a 40 41 fairness opinion relative to bidder size without an opinion must be within a certain 42 percentage, and the one closest in size will be used for comparison purposes. 43 44 Table 7, Panel B reports the results of the direct matching analysis. If I restrict the 45 46 size difference between the non-opinion bidder and the matched bidder to within 20%, I 47 am able to find a matched firm for 140 out of 178 non-opinion deals. If I restrict the size 48 49 difference to within 10%, 120 out of 178 non-opinion deals can be matched. Ideally, a 50 51 more precise match on firm size would result in more comparable matches. However, 52 finding a control firm that meets the criteria becomes harder as the allowed size 53 54 difference between firms becomes smaller, resulting in fewer observations. Panel B 55 56 reports matching results for both size ranges. Consistent with the OLS, 2SLS, and 57 58 17 59 60 Page 19 of 48 The Financial Review

1 2 3 4 propensity score matching, the direct matching analysis does not find any evidence 5 suggesting that fairness opinions negatively affect shareholders’ wealth. 6 7 8 4.4 The effect of the National Association of Securities Dealers Rule 2290 9 10 11 In this section, I take advantage of Rule 2290 and conduct an additional analysis to 12 test whether the new rule affects fairness opinion quality. In addition to providing 13 14 empirical evidence on the intended effects of the new rule, this analysis could help us 15 16 further test which hypothesis has the dominant effect. The shareholder 17 interest/transaction facilitation hypothesis argues that fairness opinion valuations provide 18 19 valuable information Foron equity Reviewexchange values. Thus, Only the benefit of obtaining a fairness 20 21 opinion should increase in the post–Rule 2290 period as fairness opinion valuation 22 becomes more accurate and informative. On the other hand, the entrenchment may be 23 24 less likely to be at work because now it is harder for investment banks to manipulate 25 26 numbers in the valuation models to placate managers. Thus, the entrenchment hypothesis 27 suggests that returns would be less negative or statistically insignificant (but non- 28 29 positive) in the post–Rule 2290 period. 30 31 In the post-scandal period, the problems and concerns with fairness opinions, 32 including conflicts of interest and potential manipulation, as discussed in Section 2.2.1., 33 34 have attracted the attention of regulatory bodies such as the National Association of 35 36 Securities Dealers (NASD) and the SEC. In November 2004, the NASD requested 37 comments on whether it should propose rules to regulate the identification and disclosure 38 39 of conflicts of interest of investment banks rendering fairness opinions, and require 40 41 investment banks to follow specified procedures when rendering fairness opinions. 42 Specifically, the NASD sought comments on two general rules. The first would regulate 43 44 the identification and disclosure of conflicts of interest by investment banks that render 45 46 fairness opinions. The second would provide specific procedures to guide investment 47 48 banks in addressing the substantive factors the banks would use in reaching opinions 49 regarding a given transaction’s fairness. 50 51 In October 2007, the SEC approved Rule 2290. This rule involves disclosures and 52 53 procedures related to the issuance of fairness opinions included in proxy statements. The 54 new rule came into effect on December 8, 2007; it requires that investment banks 55 56 disclose whether fairness opinions were approved by banks’ own fairness committees. In 57 58 18 59 60 The Financial Review Page 20 of 48

1 2 3 4 addition, investment banks were now required to disclose the amount and nature of 5 compensation once an opinion had been provided and any material business relationship 6 7 that existed during the previous two years. Appendix D details the disclosure 8 9 requirements under the new NASD Rule 2290. 10 As described in Gould and Ahmedni (2005), Rule 2290 was designed to bring several 11 12 benefits to the users of fairness opinions. First, by increasing the level of disclosure 13 14 available to shareholders in proxy materials and by instituting general procedural 15 requirements on valuation agents themselves, Rule 2290 increases the transparency of the 16 17 fairness opinion process, thereby allowing shareholders to weigh the value of a fairness 18 19 opinion for themselves.For Second, Review by increasing theOnly transparency of the relationships 20 underlying the fairness opinion process, Rule 2290 may indirectly cause boards of 21 22 directors who are already under increased scrutiny as a result of the Sarbanes-Oxley Act 23 24 and the class-action bar to reexamine the fairness opinion process and the relationships 25 26 underlying it. Third, increased transparency may provide courts and legislators with more 27 information. Based on the above, this new rule should improve the quality of fairness 28 29 opinions. 30 31 Others argue that Rule 2290 could bring unintended consequences. Because the new 32 rule increases the direct costs of rendering an opinion by increasing the human resources 33 34 required to prepare and deliver the opinion, the higher costs may discourage some boards 35 36 of directors of smaller companies from obtaining opinions. In addition, the increased 37 possibility of liability on the part of investment banks may discourage some banks from 38 39 rendering opinions, even in transactions for which such opinions would be appropriate. 40 41 Whether Rule 2290 has its intended effects or has unintended consequences remains 42 an empirical question. In this section, I provide empirical evidence to address this 43 44 question. Figure 2 shows the pattern of the use of fairness opinions over time. We 45 46 observe no evidence of a percentage decrease in the use of fairness opinions in the post– 47 Rule 2290 period, except for 2009, which coincides with the financial crisis. Overall, no 48 49 evidence suggests that the new rule discourages the use of fairness opinions by boards. In 50 51 addition, when the sample is partitioned into subsamples based on the pre– and post–Rule 52 2290, summary statistics reported in Table 8, Panel A show that the group with fairness 53 54 55 56 57 58 19 59 60 Page 21 of 48 The Financial Review

1 2 3 4 opinions experiences significantly negative returns only in the pre–Rule 2290 period but 5 not in the post–Rule 2290 period.17 6 7 To further understand the impact of the new rule on shareholders’ wealth, I examine 8 9 the impact of fairness opinions on bidder abnormal returns in the pre– and post–Rule 10 2290 periods. The regression model is specified as follows: 11 12 13 14 −2, +2=β0+β1+β22290+β3 ∗ 2290 + + 1 15 16 17 18 I am mainly interested in the sign of the interaction term, β3, which captures the 19 For Review Only 20 effect of fairness opinions on bidder abnormal returns in the post–Rule 2290 period. 21 Under the assumption of the transaction facilitation hypothesis, fairness opinions provide 22 23 boards of directors with useful information about deal valuation. If the new rule has 24 25 achieved its intended effects, we should expect the coefficient of the interaction term to 26 be significantly positive. Table 8, Panel B reports the results. The coefficient of the 27 28 interaction term is positive and significant at the 5% level across all three columns, 29 30 indicating that in the post–Rule 2290 period, the use of fairness opinions by bidders is 31 positively associated with bidder abnormal returns around the announcement.18 32 33 The results reported in Table 8, Panel B suggest that the new rule is beneficial to 34 35 shareholders, because the deals certified by fairness opinions in the post-rule period 36 experience higher announcement returns, indicating that these deals are of higher quality 37 38 than their pre-rule period counterparts. An alternative indicator of deal quality is post- 39 40 merger operating performance. If the new rule improves the quality of the deal valuation 41 process, we expect deals certified by fairness opinions in the post-rule period to have 42 43 better post-merger operating performance. To test this conjecture, I replace the dependent 44 45 variable (CAR (–2, +2)) in Equation (1) by the average return on asset (ROA) over three 46 years after deal completion. In addition, I include pre-merger ROA to control for the 47 48 bidder’s operating performance prior to the merger announcement. The sample used in 49 50 51 17 The tests of differences in means between the subsamples in these two periods indicate a statistically 52 significant difference in only the pre–Rule 2290 period. 53 18 As a robustness check, I construct alternative event windows (–2, +5) and (–2, +10) to capture any 54 possible delayed market responses. The results remain robust. To alleviate concerns that 2009 being a 55 unique year could possibly drive the results, as a robustness check I exclude observations announced in 56 2009 and find similar results. 57 58 20 59 60 The Financial Review Page 22 of 48

1 2 3 4 this test includes only completed transactions and the sample period is from 1995 to 2012 5 because I require three years of data after deal completion to measure post-merger 6 7 operating performance. 8 9 Table 9 reports the results on bidder post-merger operating performance. Column (1) 10 shows that on average, the use of fairness opinions is not significantly negatively 11 12 associated with bidder post-merger operating performance over the entire sample period. 13 14 Columns (2) to (4) show that the interaction between FO and Rule 2290 is positive and 15 significant across all three columns, consistent with the abnormal return results reported 16 17 in Table 8. 18 19 The effects of RuleFor 2290 have Review been debated. Davidoff Only (2006, p. 1596) criticizes Rule 20 2290 as “largely uneventful and a disappointment given the NASD acknowledgement of 21 22 the issues of fairness opinions.” Some commentators believe that the NASD did not go 23 24 far enough and argue that an independent third party with no preexisting relationship with 25 26 the company should perform the opinion analysis. The possibility that investment banks 27 with preexisting relationships with management may have an incentive to agree with 28 29 management’s position on a deal is concerning. 30 31 However, a requirement that an independent third party render fairness opinions 32 could exclude most large investment banks that have had preexisting relationships with 33 34 management. These investment banks are arguably more experienced than their smaller 35 36 counterparts in completing deals, will know a given company’s business and operations 37 well, and will as a result likely produce more accurate valuations. Prior studies show that 38 39 companies issuing securities tend to repeatedly hire the same investment banks (Yasuda, 40 41 2005; Ljungqvist, Marston, and Wilhelm, 2006). Asker and Ljungqvist (2010) state that 42 the vertical structure of an investment bank is characterized by relationships other than 43 44 long-term contracts. The empirical results reported in Tables 8 and 9 suggest that the 45 46 increased disclosure requirements are sufficient to address potential conflicts of interest 47 and to improve the overall quality of fairness opinions. More importantly, results reported 48 49 in Tables 8 and 9 provide additional evidence supporting the shareholder 50 51 interest/transaction facilitation hypothesis. 52 53 54 5. Conclusions and limitations 55 56 57 58 21 59 60 Page 23 of 48 The Financial Review

1 2 3 4 Using comprehensive hand-collected data, this paper examines the use of fairness 5 opinions by bidders in M&A transactions over the period 1996–2015. To avoid the 6 7 sample selection bias discussed in Cain and Denis (2013), the sample includes only deals 8 9 that required a bidder shareholder vote, and thus have fairness opinion information 10 disclosed in their proxy statement. I observe that 85% of bidders obtained fairness 11 12 opinions in those transactions during this period. In contrast to prior studies suggesting 13 14 that the use of fairness opinions significantly harms bidder shareholders’ wealth, this 15 paper finds no evidence that the use of such opinions is negatively associated with bidder 16 17 abnormal returns over the entire sample period. 18 19 The long sample periodFor studied Review in this paper enables Only us to examine the effect of Rule 20 2290, which was designed to mitigate conflicts of interest that were allegedly at the core 21 22 of concerns over fairness opinions. Results show that bidder abnormal returns around 23 24 merger announcements as well as post-merger operating performance are significantly 25 26 positively associated with the use of fairness opinions in the post–Rule 2290 period, 27 suggesting that the new rule is successfully mitigating conflicts of interest by increasing 28 29 transparency in the opinion valuation process. 30 31 Although the sample included in this study is limited to deals in which proxy 32 statements were filed to avoid certain sample selection bias, an inherent limitation of this 33 34 study is that the results may not be generalizable to all bidders because the sample used in 35 36 this study is not random. Arguably, the use of fairness opinions might have a different 37 impact on deals that do not require a shareholder vote, and thus are not required to 38 39 disclose fairness opinions and their valuation processes. The disclosure requirement itself 40 41 might have an impact on the quality of fairness opinions, because the reputational 42 concern as well as the legal risk is higher if all investors have access to the opinion 43 44 valuation details such as methodologies, discount rates, and growth rates used in forming 45 46 the valuation analysis. Thus, the findings on fairness opinions reported in this paper 47 include two effects: (1) the use of fairness opinions and (2) the disclosure of fairness 48 49 opinions. Future research could investigate the potential difference between deals with 50 51 and without fairness opinions in the absence of the disclosure requirement once such data 52 are available. The results on Rule 2290 also suggest that disclosure requirements 53 54 significantly improve the quality of fairness opinions. 55 56 57 58 22 59 60 The Financial Review Page 24 of 48

1 2 3 4 The results reported in this paper provide new insight into the use of fairness opinions 5 by bidders and have policy implications. I find that the main motivation for bidder 6 7 management to seek fairness opinions is to facilitate transactions and that the benefits of 8 9 obtaining fairness opinions justify their costs, especially in the post–Rule 2290 period. 10 These findings suggest that the transaction facilitation hypothesis has the dominant effect. 11 12 13 14 15 16 17 18 19 For Review Only 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 23 59 60 Page 25 of 48 The Financial Review

1 2 3 Appendix A: Variable definitions 4 5 6 Variable Definition Data Source 7 Cumulative abnormal percentage return in a 8 five-day window surrounding the merger CAR(–2, +2) CRSP 9 announcement using market-adjusted returns 10 11 from the CRSP value-weighted index. 12 Cash holding Cash holdings divided by book value of assets. Compustat 13 Deal value Transaction value as reported by the SDC. SDC 14 An indicator variable equal to one if the bidder 15 Diversifying is not from the same two-digit SIC industry as SDC 16 17 the target firm, and zero otherwise. An indicator variable equal to one if the bidder 18 SDC, merger Fairness opinion (FO) obtains at least one fairness opinion in the 19 For Review Only documents 20 takeover transaction, and zero otherwise. 21 The stock price one month prior to the merger 22 Market cap announcement (i.e., day –22) times the number CRSP 23 of shares outstanding. 24 The ratio of the number of shares an acquirer 25 Percentage of shares to intends to issue divided by its total number of Merger documents 26 be issued 27 shares outstanding. 28 Buy and hold abnormal percentage return in the 29 Prior year return year prior to the merger announcement using CRSP 30 31 the CRSP value-weighted index as bench mark. 32 An indicator variable that takes a value of one if 33 Public target target public status reported by the SDC is SDC 34 “Public,” and zero otherwise. 35 Deal value divided by the bidder’s book value 36 Relative size SDC, Compustat 37 of assets. 38 Return on assets (ROA) Net income divided by total assets. Compustat 39 Indicator variable denoting the merger 40 announced during the post–Rule 2290 period. It Rule 2290 41 takes the value one for merger announced after 42 43 December 2007. 44 An indicator variable equal to one if the bidder 45 Stock uses 100% stock to finance the deal, and zero SDC 46 otherwise. 47 A dummy variable equal to one if the deal is a Tender offer SDC 48 tender offer. 49 50 51 52 53 54 55 56 57 58 24

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1 2 3 Appendix B: Shareholder approval policy 4 5 Shareholder Approval Policy 6 7 Section 312.00 Shareholder Approval Policy 8 9 312.1 Shareholders Interest 10 11 Shareholders interest and participation in corporate affairs has greatly increased. 12 Management has responded by providing more extensive and frequent reports on matters of 13 interest to investors. In addition, an increasing number of important corporate decisions are being 14 15 referred to shareholders for their approval. This is especially true of transactions involving the 16 issuance of additional securities. 17 Good business practice is frequently the controlling factor in the determination of 18 management to submit a matter to shareholders for approval even though neither the law nor the 19 company’s charter makesFor such approvals Review necessary. TheOnly Exchange encourages this growth in 20 corporate democracy. For example, due to the recent growth of officer and director equity-based 21 compensation arrangements and the increased interest of shareholders in this area, companies 22 23 may determine to submit stock option and similar plans to shareholders for approval, whether or 24 not the Exchange requires such approval. 25 26 312.2 Companies Are Urged 27 28 29 Companies are urged to discuss questions relating to this subject with their Exchange 30 representative sufficiently in advance of the time for the calling of a shareholders meeting and 31 the solicitation of proxies where shareholder approval may be involved. All relevant factors will 32 be taken into consideration in applying the policy expressed in this Para. 312.00 and the 33 Exchange will advise whether or not shareholder approval will be required in a particular case. 34 35 36 312.3 Shareholder Approval 37 38 39 • (A) Shareholder approval is required for equity compensation plans. 40 41 • (B) Shareholder approval is required prior to the issuance of common stock, or of 42 securities convertible into or exercisable for common stock, in any transaction or series of 43 related transactions, to: 44 45 - 1. a director, officer or substantial security holder of the company (each a Related 46 Party) 47 48 - 2. a subsidiary, affiliate or other closely-related person of a Related Party; or 49 - 3. any company or entity in which a Related Party has a substantial direct or indirect 50 interest; 51 52 If the number of shares of common stock to be issued, or if the number of shares of 53 common stock into which the securities may be convertible or exercisable, exceeds 54 either one percent of the number of shares of common stock or one percent of the 55 voting power outstanding before the issuance. 56 57 58 25

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1 2 3 4 However, if the Related Party involved in the transaction is classified as such solely 5 6 because such person is a substantial security holder, and if the issuance relates to a 7 sale of stock for cash at a price at least as great as each of the book and market value 8 of the issuers common stock, then shareholder approval will not be required unless 9 the number of shares of common stock to be issued, or unless the number of shares of 10 common stock into which the securities may be convertible or exercisable, exceeds 11 either five percent of the number of shares of common stock or five percent of the 12 voting power outstanding before the issuance. 13 14 • (C) Shareholder approval is required prior to the issuance of common stock, or of 15 securities convertible into or exercisable for common stock, in any transaction or series of 16 17 related transactions if: 18 - 1. the common stock has, or will have upon issuance, voting power equal to or in 19 For Review Only 20 excess of 20 percent of the voting power outstanding before the issuance of such 21 stock or of securities convertible into or exercisable for common stock; or 22 - 2. the number of shares of common stock to be issued is, or will be upon issuance, 23 24 equal to or in excess of 20 percent of the number of shares of common stock 25 outstanding before the issuance of the common stock or of securities convertible into 26 or exercisable for common stock. 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 26

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1 2 3 Appendix C: Example of letter to bidder shareholders 4 5 6 Source: http://www.sec.gov/Archives/edgar/data/41499/0000950135-96-005104.txt 7 8 GILLETTE-Duracell Battery Merger As filed with the Securities and Exchange 9 Commission on November 26, 1996 10 SECURITIES AND EXCHANGE COMMISSION 11 Washington, D.C. 20549 12 Form S-4 13 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 14 THE GILLETTE COMPANY 15 16 Letter to Gillette Shareholders 17 18 Prudential Tower Building Boston, MA 02199 19 For Review Only 20 November 29, 1996 21 22 Dear Stockholder: 23 A Special Meeting of the stockholders of The Gillette Company will be held at 10:00 a.m. 24 on Monday, December 30, 1996, at the Sheraton Boston Hotel, 39 Dalton Street, Boston, 25 Massachusetts. 26 27 At the Special Meeting, holders of shares of Gillette stock will be asked to consider and 28 vote upon a proposal to approve the issuance of shares of Gillette common stock pursuant to 29 an Agreement and Plan of Merger (’’Merger Agreement”), dated as of September 12, 1996, 30 among Gillette, a wholly-owned subsidiary of Gillette, and Duracell International Inc. 31 Pursuant to the Merger Agreement, Gillette’s subsidiary will be merged into Duracell (the 32 ’Merger”), and Duracell will become a wholly-owned subsidiary of Gillette. In the Merger, 33 each outstanding share of Duracell common stock will be converted into the right to receive 34 35 0.904 shares of Gillette common stock and each outstanding option to purchase Duracell 36 common stock will become an option to purchase Gillette common stock. 37 Your Board of Directors has carefully reviewed and considered the terms and conditions 38 of the Merger and has received the opinions of Merrill Lynch, Pierce, Fenner & Smith 39 Incorporated and J. P. Morgan Securities Inc., its financial advisors, that, as of September 12, 40 1996 and based on and subject to certain matters stated therein, the consideration to be paid 41 by Gillette in the Merger was fair to Gillette from a financial point of view. Copies of these 42 43 opinions are attached as Annexes B and C to the accompanying Joint Proxy 44 Statement/Prospectus. 45 THE BOARD OF DIRECTORS OF GILLETTE HAS DETERMINED THAT THE 46 MERGER IS FAIR TO GILLETTE AND IN THE BEST INTERESTS OF ITS 47 STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS HAS APPROVED 48 THE MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE IN FAVOR OF 49 50 THE ISSUANCE OF SHARES OF GILLETTE COMMON STOCK IN CONNECTION WITH 51 THE MERGER. 52 Your vote is important regardless of how many shares you own. Please take a few minutes 53 now to review the proxy statement and to sign and date your proxy and return it in the envelope 54 provided. You may attend the meeting and vote in person even if you have previously returned 55 your proxy. 56 57 58 27

59 60 Page 29 of 48 The Financial Review

1 2 3 Sincerely, 4 ALFRED M. ZEIEN 5 6 Chairman of the Board and Chief Executive Officer 7 8 9 10 11 12 13 14 15 16 17 18 19 For Review Only 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 28

59 60 The Financial Review Page 30 of 48

1 2 3 4 Appendix D: New NASD Rule 2290 regarding fairness opinions 5 6 Source: http://www.finra.org/industry/notices/07-54 2290. Fairness Opinions 7 8 (a) Disclosures 9 If at the time a fairness opinion is issued to the board of directors of a company the member 10 issuing the fairness opinion knows or has reason to know that the fairness opinion will be 11 provided or described to the company’s public shareholders, the member must disclose in the 12 13 fairness opinion: 14 • (1) if the member has acted as a financial advisor to any party to the transaction that is the 15 16 subject of the fairness opinion, and, if applicable, that it will receive compensation that is 17 contingent upon the successful completion of the transaction, for rendering the fairness 18 opinion and/or serving as an advisor; 19 For Review Only 20 • (2) if the member will receive any other significant payment or compensation contingent 21 upon the successful completion of the transaction; 22 23 • (3) any material relationships that existed during the past two years or that are mutually 24 understood to be contemplated in which any compensation was received or is intended to 25 be received as a result of the relationship between the member and any party to the 26 transaction that is the subject of the fairness opinion; 27 28 • (4) if any information that formed a substantial basis for the fairness opinion that was 29 supplied to the member by the company requesting the opinion concerning the companies 30 that are parties to the transaction has been independently verified by the member, and if so, 31 a description of the information or categories of information that were verified; 32 33 • (5) whether or not the fairness opinion was approved or issued by a fairness committee; 34 and 35 36 • (6) whether or not the fairness opinion expresses an opinion about the fairness of the 37 amount or nature of the compensation to any of the company’s officers, directors or 38 employees, or class of such persons, relative to the compensation to the public 39 40 shareholders of the company 41 42 (b) Procedures 43 Any member issuing a fairness opinion must have written procedures for approval of a fairness 44 opinion by the member, including: 45 46 • (1) the types of transactions and the circumstances in which the member will use a fairness 47 committee to approve or issue a fairness opinion, and in those transactions in which it uses 48 a fairness committee: 49 50 - (A) the process for selecting personnel to be on the fairness committee; 51 52 - (B) the necessary qualifications of persons serving on the fairness committee; 53 - (C) the process to promote a balanced review by the fairness committee, which shall 54 include the review and approval by persons who do not serve on the deal team to the 55 transaction; and 56 57 58 29

59 60 Page 31 of 48 The Financial Review

1 2 3 • (2) the process to determine whether the valuation analyses used in the fairness opinion are 4 appropriate. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 For Review Only 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 30

59 60 The Financial Review Page 32 of 48

1 2 3 References 4 5 Asker, J. and A. Ljungqvist, 2010. Competition and the structure of vertical relationships in 6 capital markets, Journal of Political Economy 118, 599–647. 7 8 Bamber, L.S., J. Jiang, K.R. Petroni, and I.Y. Wang, 2010. Comprehensive income: Who’s afraid 9 of performance reporting?, The Accounting Review 85, 97–126. 10 11 Bebchuk, L.A. and M. Kahan, 1989. Fairness opinions: How fair are they and what can be done 12 about it?, Duke Law Journal 1989, 27–53. 13 14 Berle, A.A. and G.G.C. Means, 1932. The Modern Corporation and Private Property 15 (Macmillan, New York). 16 17 Boone, A.L. and J.H. Mulherin, 2007. How are firms sold?, The Journal of Finance 62, 847– 18 875. 19 For Review Only 20 Bowers, H.M. and W.R. Latham, 2006. Information asymmetry, litigation risk, uncertainty and 21 the demand for fairness opinions: Evidence from U.S. mergers and acquisitions, 1980–2002, 22 available at: SSRN 626321. 23 24 Burgstahler, D.C., L. Hail, and C. Leuz, 2006. The importance of reporting incentives: Earnings 25 management in European private and public firms, The Accounting Review 81, 983–1016. 26 27 Cain, M. and D. Denis, 2013. Information production by investment banks: Evidence from 28 fairness opinions, Journal of Law and Economics 56, 245–280. 29 30 Chalmers, J.M., L.Y. Dann, and J. Harford, 2002. Managerial opportunism? Evidence from 31 directors and officers insurance purchases, The Journal of Finance 57, 609–636. 32 33 Chang, S., 1998. Takeovers of privately held targets, methods of payment, and bidder returns, 34 The Journal of Finance, 773–784. 35 36 Chen, L.H. and H. Sami, 2006. Does the use of fairness opinions impair the acquirers’ abnormal 37 returns? The litigation risk effect. Working paper, Arizona State University and Lehigh 38 39 University. 40 Chung, H.H. and J.P. Wynn, 2008. Managerial legal liability coverage and earnings 41 42 conservatism, Journal of Accounting and Economics 46, 135–153. 43 Coates, J.C., 2001. Explaining variation in takeover defenses: Blame the lawyers, California Law 44 45 Review 89, 1301–1421. 46 Davidoff, S., 2006. Fairness opinions, American University Law Review 55, 1557–1625. 47 48 DeAngelo, H., 1981. Competition and unanimity, American Economic Review 71, 18–27. 49 50 DeAngelo, L.E., 1986. Accounting numbers as market valuation substitutes: A study of 51 management of public stockholders, The Accounting Review 61, 400–420. 52 53 DeAngelo, L.E., 1990. Equity valuation and corporate control, The Accounting Review 65, 93– 54 112. 55 56 57 58 31

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1 2 3 Elson, C.M., 1992. Fairness opinions: Are they fair or should we care?, Ohio State Law Journal 4 53, 951. 5 6 Elson, C.M, A.H. Rosenbloom, and D.G.L. Chapman, 2003. Fairness opinions: Can they be 7 made useful?, Securities Regulation and Law Report 35. 8 9 Fama, E.F., 1980. Agency problems and the theory of the firm, Journal of Political Economy 88, 10 288–307. 11 12 Ferro, J., M. Messina, and B. Benoit, 2015. Raising the bar for fairness opinions, Transaction 13 Advisors. 14 15 Frye, M.B. and W. Wang, 2010. Boards, uncertainty, and the use of fairness opinions, Corporate 16 Governance: An International Review 18, 48–63. 17 18 Fuller, K., J. Netter, and M. Stegemoller, 2002. What do returns to acquiring firms tell us? 19 Evidence from firms thatFor make manyReview acquisitions, TheOnly Journal of Finance 57, 1763–1793. 20 21 Gould, J. and Z. Ahmedni, 2005. NASD expands fairness opinion disclosure, International 22 Financial Law Review 24, 26. 23 24 Harford, J., 1999. Corporate cash reserves and acquisitions, The Journal of Finance 54, 1969– 25 1997. 26 27 Harford, J., S.A. Mansi, and W.F. Maxwell, 2008. Corporate governance and firm cash holdings 28 in the US, Journal of Financial Economics 87, 535–555. 29 30 Jensen, M.C. and W.H. Meckling, 1976. Theory of the firm: Managerial behavior, agency costs 31 and ownership structure, Journal of Financial Economics 3, 305–360. 32 33 Johnson, W.C., J.M. Karpoff, and S. Yi, 2015. The bonding hypothesis of takeover defenses: 34 Evidence from IPO firms, Journal of Financial Economics 117, 307–332. 35 36 Kisgen, D.J., J. Qian, and W. Song, 2009. Are fairness opinions fair? The case of mergers and 37 38 acquisitions, Journal of Financial Economics 91, 179–207. 39 Leuz, C., D. Nanda, and P.D. Wysocki, 2003. Earnings management and investor protection: An 40 41 international comparison, Journal of Financial Economics 69, 505–527. 42 Li, K., T. Liu, and J.J. Wu, 2016. Vote avoidance and shareholder voting in mergers and 43 44 acquisitions, available at: SSRN 2801580. 45 Lin, C., M.S. Officer, and H. Zou, 2011. Directors’ and officers’ liability insurance and 46 47 acquisition outcomes, Journal of Financial Economics 102, 507–525. 48 Liu, T., 2017. Information provision in the corporate acquisition process: The causes and effects 49 50 of target fairness opinions. Working paper, Creighton University. 51 Liu, T. and H. Mulherin, 2018. How has takeover competition changed over time?, Journal of 52 53 , forthcoming. 54 55 56 57 58 32

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1 2 3 Ljungqvist, A., F. Marston, and W.J. Wilhelm, 2006. Competing for securities 4 mandates: Banking relationships and analyst recommendations, The Journal of Finance 61, 5 6 301–340. 7 Makhija, A. and R. Narayanan, 2007. Fairness opinions in mergers and acquisitions. Working 8 paper, Fisher College of Business. 9 10 Masulis, R.W., C. Wang, and F. Xie, 2007. Corporate governance and acquirer returns, The 11 12 Journal of Finance 62, 1851–1889. 13 Moeller, S.B., F.P. Schlingemann, and R.M. Stulz, 2004. Firm size and the gains from 14 15 acquisitions, Journal of Financial Economics 73, 201–228. 16 Oesterle, D.A., 1992. Fairness opinions as magic pieces of paper, Washington University Law 17 18 Quarterly 70, 541. 19 Officer, M.S., 2007. TheFor price of corporateReview liquidity: OnlyAcquisition discounts for unlisted targets, 20 21 Journal of Financial Economics 83, 571–598. 22 Officer, M.S., A.B. Poulsen, and M. Stegemoller, 2009. Target-firm information asymmetry and 23 24 acquirer returns, Review of Finance 13, 467–493. 25 26 Petersen, M.A., 2009. Estimating standard errors in finance panel data sets: Comparing 27 approaches, Review of Financial Studies 22, 435–480. 28 29 Song, W., J.D. Wei, and L. Zhou, 2012. The value of boutique financial advisors in mergers and 30 acquisitions, Journal of Corporate Finance 20, 94–114. 31 32 Stock, J.H. and M. Yogo, 2005. Testing for weak instruments in linear IV regression, in: D.W. 33 Andrews and J.H. Stock, eds., Identification and Inference for Econometric Models: Essays in 34 Honor of Thomas Rothenberg (Cambridge University Press, New York). 35 36 Yasuda, A., 2005. Do bank relationships affect the firm’s underwriter choice in the corporate- 37 underwriting market?, The Journal of Finance 60, 1259–1292. 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 33

59 60

announced a Merger on Auguston 31, 2009 rendered Goldman Sachs fairness opinion Auguston 30, 2009 Goldman , , July 23, 2009 On On Sachs discussed preliminaryits financial analysis regarding a potential transaction

34 34 The Financial Review June 17, 2009, the board of of

On On Baker Hughes delivered written a nonbinding expression of interest and a confidentiality agreement the the board 9, 9, 200

financial analyses For Review Only On On June 11, Baker discussed management with preliminary regarding a possible transaction prepared by Goldman Sachs

On On August 11, 2008, the the board of Baker Hughes and Goldman Sachs discussed a potential transaction CEO CEO of Baker Hughes contacted CEO of BJ Services Julyin 2008 line shows the following dates: when the deal was initiated, when financial advisers were contacted, when fairness opinions were were opinions fairness contacted, when were advisers financial when deal was initiated, the when dates: following the shows line documents, of EDGAR historical information archive the The is from was released. announcement the merger and when delivered, background section. the S-4, FORM

This figure displays the negotiation process of the merger between Baker Hughes (the bidder) and BJ Services (the target). This time target). (the and bidder) BJ (the Hughes Services between Baker the merger of process the negotiation displays figure This Figure 1 Figure process negotiation line of merger a time typical A Page 35 of 48 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 The Financial Review Page 36 of 48

1 2 3 Figure 2 4 5 Use of FO reported by merger documents and by the SDC 6 7 This figure compares the percentages of deals with fairness opinions sought by bidders 8 reported by merger documents and the SDC, respectively. In each year, the percentage of 9 FO (reported by each data source) is calculated by dividing the deals with bidder use of 10 fairness opinions (reported by each data source) by the total number of transactions in that 11 12 year. The sample period is from 1995 to 2015. 13 14 Comparison of the use of FO based on different data sources 15 16 17 18 90% 19 For Review Only 20 21 70% 22 23 24 50% 25 26 27 30% 28 29 30 10% 31 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 32 33 % FO (Merger Documents) % FO (SDC) 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 35

59 60 NA NA NA NA –0.006* –0.006* –0.023*** –0.023*** –0.035*** –0.035*** –0.039*** –0.039*** Bidder CAR (FO = 1) = (FO CAR Bidder 1) = (FO CAR Bidder

0)= to (FO CAR relative 0)= to (FO CAR relative 35% 35% 83% 83% 31% 31% 19% 19% 37% 37% % Bidder FO Bidder % FO Bidder % 36 36 The Financial Review SDC, verified deals in which SDC deals SDC, verified Data Source Source Data Source Data

For Review Only 1996–2003 1996–2003 used was adviser financial a indicated 9% Sample Period Sample Sample Period Sample

Kisgen, Qian, and Song (2009) (2009) Song and Qian, Kisgen, 1994–2003 documents Merger (2006) and Latham Bowers 1980–2002 SDC (2013) Denis and Cain 1998–2005 documents Merger Frye and Wang (2010) (2010) Wang and Frye Table 1 Table approval on shareholder withwithout conditioning and FO of bidder Comparison This table provides an overview of the use of Authors, fairness time opinions period, data and source the about associated fairness wealth opinions, the effects percentage (when of available) bidders of obtaining sixfairness opinions, studies. and the effects of separate deals based on whether bidder shareholder approval was required. Panel B reports the results of the one study investigating Authors Sami (2007) and Chen 1997–2003 documents Merger Makhija and Narayanan (2007) (2007) Narayanan and Makhija 1980–2004 SDC Authors Authors Panel A: Sample without conditioning on shareholder approval approval shareholder on without conditioning Sample A: Panel bidder bidder opinion on announcement returns are all variables taken from the original studies. Panel A summarizes studies that do approval. shareholder bidder of requirement the on conditioned opinions fairness bidder not approval conditioningshareholder on Sample B: Panel Page 37 of 48 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 The Financial Review Page 38 of 48

1 2 3 Table 2 4 5 Sample formation 6 7 This table describes the formation of the sample. Deals are drawn from the 1995–2015 time 8 9 period. I require bidders to be public firms traded on the three major exchanges, and the deal 10 status to be either “completed” or “withdrawn.” I also require the deal value reported by the SDC 11 to be higher than $1 million in 1995 dollars. I further require that bidders seek to purchase 50% 12 or more of target ownership and seek to own 100% after the transaction. I merge the SDC with 13 CRSP and Compustat to get bidder price and return data and basic accounting data around 14 merger announcements. I require that the percentage of shares bidders intend to issue to be 15 16 higher than 0% and smaller than 100%. Finally, I drop deals without proxy statements available 17 on EDGAR and deals where bidder shareholder approval is not required. 18 19 Sample filters For Review Only # of deals 20 Date Announced: 01/01/1995 to 12/31/2015 & Form of the Deal: AA, 184,503 21 AM, M 22 Acquirer Public Status: P 84,488 23 24 Percent of Shares Held at Announcement: less than 50% 84,458 25 Percent of Shares Acquirer is Seeking to Own after Transaction: 100% 79,713 26 Target Public Status: V, P, S 79,326 27 Deal Value ($ Mil): 1 (1995 dollar) & Return Data on CRSP

28 & Basic Accounting Data on Compustat 26,513 29 Relative size > 1% 21,866 30 Share issuance > 0 & Traded on NYSE, AMEX, and NASDAQ 5,512 31 32 Exclude Share Issuance >100% 5,337 33 Exclude Deals without Proxy Statements Available on SEC EDGAR 34 Website 35 & Do Not Require Shareholders Approval 1,211 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 37 59 60 Page 39 of 48 The Financial Review

1 2 3 Table 3 4 5 Sample distribution 6 7 8 This table reports the number of deals per year for the sample period 1995–2015. Observations 9 are placed in the year of announcement. Data are reported for the full sample and for subgroups 10 of the use of fairness opinions. FO means the bidder obtains at least one fairness opinion. The 11 last three columns provide comparisons of the data on the use of fairness opinions hand collected 12 13 from merger documents with the fairness opinion data reported by the SDC. Difference is the 14 percent difference of use of fairness opinions between the SEC and SDC data by year. 15 16 FO (Proxy FO 17 Year # of deals documents) Percent (SDC) Percent Difference 18 78.6% 48.6% 30.0% 19 1995 70 For Review55 Only34 20 1996 114 91 79.8% 57 50.0% 29.8% 21 1997 152 125 82.2% 72 47.4% 34.9% 22 1998 138 114 82.6% 43 31.2% 51.4% 23 24 1999 113 93 82.3% 61 54.0% 28.3% 25 2000 103 91 88.3% 18 17.5% 70.9% 26 2001 80 65 81.3% 27 33.8% 47.5% 27 2002 33 29 87.9% 11 33.3% 54.5% 28 29 2003 42 38 90.5% 29 69.0% 21.4% 30 2004 44 42 95.5% 37 84.1% 11.4% 31 2005 40 35 87.5% 30 75.0% 12.5% 32 2006 33 31 93.9% 29 87.9% 6.1% 33 34 2007 26 23 88.5% 23 88.5% 0.0% 35 2008 28 25 89.3% 24 85.7% 3.6% 36 2009 34 23 67.6% 23 67.6% 0.0% 37 2010 15 13 86.7% 13 86.7% 0.0% 38 39 2011 19 19 100.0% 18 94.7% 5.3% 40 2012 23 23 100.0% 14 60.9% 39.1% 41 2013 26 24 92.3% 17 65.4% 26.9% 42 2014 46 43 93.5% 33 71.7% 21.7% 43 44 2015 32 31 96.9% 22 68.8% 28.1% 45 46 Total 1,211 1,033 85.3% 635 52.4% 32.9% 47 48 49 50 51 52 53 54 55 56 57 58 38 59 60 The Financial Review Page 40 of 48

1 2 3 Table 4 4 5 Summary statistics 6 7 This table presents summary statistics of the 1,211 M&A deals that require bidder shareholder 8 approval for the sample period 1995–2015. Panel A reports the summary statistics for the full 9 sample. Panel B reports the summary statistics for subgroups by the use of fairness opinions. The 10 11 last two columns of Panel B present the tests of differences in means and medians between the 12 two subsamples. Definitions of all variables are provided in Appendix A. ***, **, * correspond 13 to statistical significance at the 1%, 5%, and 10% levels, respectively. 14 15 Panel A: The full sample 16 25th 75th 17 18 Variable Mean Median Pctl Pctl Std Dev N 19 Deal value For2,133.40 Review 204.03 55.56 Only 1,048.88 7,758.50 1,211 20 Stock 0.67 1.00 0.00 1.00 0.47 1,211 21 Market cap 4,526.00 501.06 133.31 2,125.22 15,888.42 1,211 22 23 Relative size 1.04 0.44 0.11 0.98 4.32 1,211 24 Diversifying 0.26 0.00 0.00 1.00 0.44 1,211 25 Tender offer 0.01 0.00 0.00 0.00 0.09 1,211 26 Public target 0.72 1.00 0.00 1.00 0.45 1,211 27 28 Percent of shares to be 29 issued 50.29 45.23 31.42 65.63 21.95 1,211 30 Withdrawn 0.11 0.00 0.00 0.00 0.31 1,211 31 Cash holding 0.12 0.05 0.02 0.16 0.17 1,211 32 Prior year return 0.19 0.13 -0.10 0.40 0.58 1,211 33 34 35 Panel B: Comparing deals with FO versus those without FO 36 FO = 1 (N = 1,033) FO = 0 (N = 178) Test of difference 37 38 Wilcoxon 39 Variable Mean Median Mean Median t-test test 40 (1) (2) (3) (4) (1)–(3) (2)–(4) 41 Deal value 2,273.03 232.60 1,323.02 78.70 950.01** 153.90*** 42 Stock 0.65 1.00 0.77 1.00 –0.12*** 0.00*** 43 44 Market cap 4,796.23 568.22 2,957.80 188.65 1,838.43** 379.57*** 45 Relative size 1.10 0.45 0.67 0.36 0.43 0.08* 46 Diversifying 0.25 0.00 0.32 0.00 –0.07** 0.00** 47 Tender offer 0.00 0.00 0.03 0.00 –0.03*** 0.00*** 48 49 Public target 0.74 1.00 0.61 1.00 0.13*** 0.00*** 50 Percent of shares to be 51.08 46.21 45.68 40.31 5.40*** 5.91*** 51 issued 52 Withdrawn 0.08 0.00 0.28 0.00 –0.20*** 0.00*** 53 Cash holding 0.12 0.05 0.12 0.04 0.01 0.01 54 55 Prior year return 0.18 0.12 0.29 0.17 –0.12** –0.04* 56 57 58 39 59 60 Page 41 of 48 The Financial Review

1 2 3 Table 5 4 5 The impact of fairness opinions on bidder announcement CARs 6 7 This table reports the impact of fairness opinions on the bidder abnormal announcement returns. 8 Panel A reports summary statistics and Panel B reports OLS regression results. The dependent 9 variable, CAR (–2,+2), is the cumulative abnormal return in a five-day window surrounding the 10 11 merger announcement using market-adjusted returns from the CRSP value-weighted index. The 12 sample period is 1995–2015. Standard errors in regressions are estimated with clustered errors at 13 the firm level. Industry effects are controlled in model (4) using two-digit SIC Code. Robust t- 14 statistics are reported in parentheses in Panel B. Definitions of all variables are provided in 15 Appendix A. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, 16 respectively. 17 18 19 Panel A: Summary statisticsFor Review Only 20 21 25th 22 CAR (–2, +2) Mean Median Pctl 75th Pctl Std Dev T-Value N 23 Full sample –0.001 –0.012 –0.068 0.042 0.147 –0.320 1,211 24 Public 25 Targets –0.029 –0.024 –0.084 0.021 0.106 –8.140 877 26 27 Private 28 Targets 0.071 0.029 –0.022 0.120 0.204 6.400 334 29 FO = 0 0.021 –0.006 –0.055 0.055 0.135 2.040 178 30 FO = 1 –0.008 –0.013 –0.070 0.040 0.121 –2.080 1,033 31 32 33 Panel B: OLS regression analysis 34 (1) (2) (3) (4) 35 Dep. Var. CAR (–2, +2) 36 Constant 0.021** 0.111*** 0.124*** 0.172*** 37 (2.04) (7.36) (7.03) (6.73) 38 39 FO –0.029*** –0.012 –0.009 –0.010 40 (–2.64) (–1.11) (–0.83) (–0.88) 41 Log (Market cap) –0.007*** –0.008*** –0.009*** 42 (–3.53) (–3.99) (–4.49) 43 Relative size –0.006* –0.001 –0.002 44 (–1.70) (–0.27) (–0.35) 45 46 Public target –0.077*** –0.079*** –0.077*** 47 (–8.24) (–8.07) (–7.71) 48 Stock 0.002 0.005 49 (0.25) (0.68) 50 Diversifying 0.007 0.002 51 (0.83) (0.21) 52 Tender offer 0.042 0.040 53 54 (1.11) (1.08) 55 Pct of shares to be issued –0.000 –0.000 56 (–0.86) (–1.62) 57 58 40 59 60 The Financial Review Page 42 of 48

1 2 3 Prior year return –0.010 –0.006 4 (–1.17) (–0.63) 5 6 Cash holding –0.080*** –0.079** 7 (–2.90) (–2.56) 8 9 Industry effects No No No Yes 10 Observations 1,211 1,211 1,211 1,211 11 R-squared 0.007 0.121 0.133 0.181 12 13 14 15 16 17 18 19 For Review Only 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 41 59 60 Page 43 of 48 The Financial Review

1 2 3 Table 6 4 5 The two-stage regression analysis 6 7 This table reports the results of the 2SLS analysis. The first stage (model (2)) uses an instrument, 8 law firm geographical concentration, which is a dummy variable equal to one if the bidder is 9 located in one of three states (California, New York, and Massachusetts) in which law firms are 10 11 highly concentrated. The estimated use of fairness opinions from the first stage is used in the 12 second-stage regression (model (3)), in which the dependent variable is the bidder announcement 13 return, CAR(–2, +2), which is the cumulative abnormal return in a five-day window 14 surrounding the merger announcement using market-adjusted returns from the CRSP value- 15 weighted index. The sample period is 1995–2015. Standard errors in regressions are estimated 16 with clustered errors at the firm level. Industry effects are controlled in models (2) and (3) using 17 two-digit SIC Code. Robust t-statistics are reported in parentheses. Definitions of all variables 18 are provided in Appendix A. ***, **, and * indicate statistical significance at the 1%, 5%, and 19 For Review Only 20 10% levels, respectively. 21 22 23 (1) (2) (3) 24 First Stage Second Stage 25 Dep. Var. FO FO CAR (–2, +2) 26 27 28 Constant 0.831*** 0.673* 0.158 29 (67.50) (1.92) (1.14) 30 Law firm geographical concentration 0.069*** 0.074*** 31 (3.17) (3.18) 32 FO 0.016 33 (0.15) 34 Log (Market cap) 0.027*** –0.010*** 35 36 (4.31) (–2.74) 37 Relative size 0.010 –0.003 38 (0.99) (–0.76) 39 Public target 0.054** –0.081*** 40 (2.19) (–7.83) 41 Stock –0.082*** 0.008 42 43 (–3.57) (0.69) 44 Diversifying –0.036 0.003 45 (–1.40) (0.35) 46 Tender offer –0.538*** 0.054 47 (–4.60) (0.77) 48 Pct of shares to be issued 0.001*** –0.000 49 (2.81) (–1.36) 50 51 Prior year return –0.037* –0.004 52 (–1.68) (–0.51) 53 Cash holding 0.120 –0.088*** 54 (1.60) (–2.98) 55 56 57 58 42 59 60 The Financial Review Page 44 of 48

1 2 3 Industry effects No Yes Yes 4 Observations 1,211 1,211 1,211 5 6 R-squared 0.008 0.114 0.174 7 8 9 10 11 12 13 14 15 16 17 18 19 For Review Only 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 43 59 60 Page 45 of 48 The Financial Review

1 2 3 Table 7 4 5 The matching analysis 6 7 8 This table presents the results of the matching analysis of bidder announcement returns. Panel A 9 reports the results of a propensity score matching analysis and Panel B reports the results of a 10 direct matching analysis. The dependent variable, CAR (–2,+2), is the cumulative abnormal 11 return in a five-day window surrounding the merger announcement using market-adjusted 12 returns from the CRSP value-weighted index. The first stage in the propensity score matching 13 computes a propensity score, which is the probability that a bidder will use fairness opinions. 14 The second stage matches the firm that did use fairness opinions (FO = 1) with a sample firm 15 16 that did not use fairness opinions (FO = 0). In Panel A, the unmatched sample computes the 17 simple average of returns for the two groups. The matched sample compares the fairness opinion 18 firms to their counterparts based on the nearest matched non-opinion firms that are in the region 19 of common support. TheFor direct matchingReview process (Panel Only B) matches firms that do not have 20 fairness opinions (FO = 0) with firms that do have fairness opinions (FO = 1) explicitly on the 21 following criteria: (1) they are from the same industry, (2) they use the same method of payment 22 23 (i.e., all stock or mixed), (3) the type of the target being acquired is the same (i.e., public target 24 or private target), and (4) the firm size difference is within 20% (Panel B.1) and 10% (Panel 25 B.2). 26 27 28 Panel A: Propensity score matching 29 30 FO = 31 Sample 1 FO = 0 FO (1) – FO (0) Std Dev T-Value 32 Unmatched –0.78% 2.07% –2.85% 0.01 –2.85 33 Matched –0.78% –0.79% 0.01% 0.02 0.00 34 35 36 Panel B: Direct matching 37 Panel B.1: Direct matching (firm size (FO = 1) relative to firm size (FO = 0): from 80% to 38 120%) 39 N Mean Median Std Dev T-Value 40 41 FO = 1 142 2.36% 0.01% 17.66% 1.60 42 FO = 0 142 0.58% –0.89% 11.92% 0.58 43 FO (1) – FO (0) 142 1.78% 1.52% 20.51% 1.03 44 Panel B.2: Direct matching (firm size (FO = 1) relative to firm size (FO = 0): from 90% to 45 46 110%) 47 N Mean Median Std Dev T-Value 48 FO = 1 120 2.37% –0.11% 18.94% 1.37 49 FO = 0 120 –0.02% –1.18% 11.62% –0.01 50 51 FO (1) – FO (0) 120 2.38% 1.52% 21.36% 1.22 52 53 54 55 56 57 58 44 59 60 The Financial Review Page 46 of 48

1 2 3 Table 8 4 5 6 The impact of Rule 2290 on bidder abnormal returns 7 8 This table reports regression analysis of the impact of Rule 2290. Panel A reports summary 9 statistics and Panel B reports OLS regression results. The dependent variable is CAR (–2,+2). 10 The independent variables include a dummy variable indicating the use of fairness opinions 11 (FO), a dummy variable indicating the post–Rule 2290 period (Rule2290), an interaction 12 between FO and Rule2290, and other control variables. The sample period is 1995–2015. 13 14 Standard errors are estimated with clustered errors at the firm level. Robust t-statistics are 15 reported in parentheses. Definitions of all variables are provided in Appendix A. ***, **, and * 16 indicate statistical significance at the 1%, 5%, and 10% levels, respectively. 17 18 Panel A: Summary statistics 19 For Review Only75th T- 20 21 CAR (–2, +2) Mean Median 25th Pctl Pctl Std Dev Value N 22 Pre–Rule 2290 23 FO = 0 0.028 –0.001 –0.054 0.075 0.139 2.65 173 24 FO = 1 –0.010 –0.015 –0.078 0.037 0.123 –2.36 867 25 Post–Rule 2290 26 FO = 0 0.000 –0.010 –0.052 0.024 0.129 0.00 24 27 28 FO = 1 0.012 –0.002 –0.052 0.059 0.112 1.56 206 29 Panel B: OLS regression analysis 30 (1) (2) (3) 31 Dep. Var. CAR (–2, +2) 32 Constant 0.119*** 0.143*** 0.180*** 33 (7.66) (6.68) (5.30) 34 35 FO*Rule2290 0.071** 0.064** 0.074** 36 (2.45) (2.05) (2.25) 37 FO –0.022* –0.018 –0.019 38 (–1.93) (–1.28) (–1.33) 39 Rule2290 –0.047* –0.037 –0.044 40 (–1.69) (–1.24) (–1.39) 41 42 Log (Market cap) –0.007*** –0.009*** –0.011*** 43 (–3.86) (–4.34) (–4.83) 44 Relative size –0.005 0.001 –0.000 45 (–1.42) (0.16) (–0.03) 46 Public target –0.077*** –0.090*** –0.089*** 47 (–8.24) (–7.26) (–6.93) 48 Stock 0.010 0.014 49 50 (1.17) (1.53) 51 Diversifying 0.015 0.012 52 (1.30) (0.92) 53 Tender offer 0.054 0.049 54 (1.31) (1.18) 55 Pct of shares to –0.000 –0.000* 56 57 58 45 59 60 Page 47 of 48 The Financial Review

1 2 3 be issued 4 (–1.28) (–1.95) 5 6 Prior year return –0.010 –0.005 7 (–0.99) (–0.45) 8 Cash holding –0.097*** –0.104*** 9 (–3.23) (–2.99) 10 Crisis2009 –0.009 –0.013 11 (–0.46) (–0.65) 12 Industry effects No No Yes 13 14 Observations 1,211 1,211 1,211 15 R-squared 0.129 0.140 0.169 16 17 18 19 For Review Only 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 46 59 60 The Financial Review Page 48 of 48

1 2 3 Table 9 4 5 6 The impact of Rule 2290 on bidder post-merger operating performance

7 This table reports the regression analysis of bidder post-merger operating performance. The 8 dependent variable is bidder post-merger three-year average ROA, measured by net income 9 divided by total assets. The independent variables include a dummy variable indicating the use of 10 fairness opinions (FO), a dummy variable indicating the post–Rule 2290 period (Rule2290), an 11 interaction between FO and Rule2290, and other control variables. The sample period is 1995– 12 2012. Standard errors are estimated with clustered errors at the firm level. Industry effects are 13 controlled in model (4) using the two-digit SIC Code. Robust t-statistics are reported in 14 parentheses. Definitions of all variables are provided in Appendix A. ***, **, and * indicate 15 statistical significance at the 1%, 5%, and 10% levels, respectively. 16 17 (1) (2) (3) (4) 18 Dep. Var. Post-merger three-year average ROA 19 For Review Only 20 Constant –0.031** –0.020** –0.003 –0.104** 21 (–2.54) (–2.00) (–0.11) (–1.96) 22 23 FO*Rule2290 0.213** 0.153** 0.121* 24 (2.06) (2.28) (1.86) 25 FO –0.022 –0.037*** –0.018 –0.016 26 (–1.47) (–2.74) (–1.50) (–1.22) 27 Rule2290 –0.173* –0.149** –0.113* 28 (–1.68) (–2.23) (–1.74) 29 Log (Market cap) 0.009** 0.012*** 30 31 (2.41) (3.05) 32 Relative size –0.046*** –0.041*** 33 (–4.39) (–3.45) 34 Public target –0.011 –0.014 35 (–0.72) (–0.86) 36 Stock –0.029** –0.021 37 (–2.39) (–1.62) 38 39 Diversifying –0.005 –0.004 40 (–0.28) (–0.21) 41 Tender offer 0.050 0.083* 42 (1.12) (1.66) 43 Pct of shares to be issued –0.000 –0.000 44 (–0.48) (–0.35) 45 46 Prior year return 0.013 0.001 47 (0.53) (0.06) 48 Cash holding –0.077 0.011 49 (–1.07) (0.13) 50 ROA (pre-merger) 0.330*** 0.325*** 51 (4.21) (3.95) 52 Industry effects No No No Yes 53 54 Observations 749 749 749 749 55 R-squared 0.001 0.010 0.260 0.302 56 57 58 47 59 60