Essays on mergers and acquisitions, investment banking and divestitures

This thesis contains two essays in mergers and acquisitions. The first essay examines the role of investment banks advising targets in mergers and acquisitions, and the second essay explores why buyer firms earn positive abnormal returns when they announce acquisitions of other firms' subsidiaries.; In the first essay, I find that when target firms are advised by top-tier investment banks, target firms earn 3% higher returns, combined returns are 1% higher, target share of gains is 11% greater, but acquirer returns are not necessarily lower. In deals where top banks advise targets, more bidders compete for the targets, offer premiums are 6% higher, and the method of payment is 12% more likely in cash. Controlling for self-selection does not erode, but in some cases strengthens, these results. I attempt to distinguish between the bargaining and matchmaking hypotheses. The bargaining hypothesis predicts that top banks advising targets are associated with lower acquirer abnormal returns and higher target share of gains, while the matchmaking hypothesis implies top banks are associated with higher combined abnormal returns, and higher percent of cash payment. The overall data suggest that top banks advising targets lead to better matching between acquirers and targets, rather than just redistributing value from acquirers to targets.; Reported in the second essay, buyer firm returns are higher when seller firms are under any pressure, measured by selling additional assets in a short time or being under bankruptcy. The market-wide asset liquidity has a negative effect on buyer firm returns, suggesting that a liquid market of similar assets helps alleviate the tension on seller firms to sell assets in deep discount. In addition, for a subset of deals where the accounting data are available, buyer firms earn higher abnormal returns when the seller firms' short-term liquidity is lower, and when the buyer firm is more liquid than the seller firm. The findings suggest that buyer firm abnormal returns are correlated not only with the seller firms' pressure from keeping up with operational schedules, with the seller firms' financial liquidity, with the general market condition on asset liquidity, but also with the relative financial strength between the buyer and seller firms.