Essays in investment banking and merger fees

The three papers in this dissertation provide a theoretical and empirical examination of investment banking, focusing on the merger advisory market. In the first chapter of this dissertation, I examine the effect of market share on quality choice in a duopoly model of competition. In this essay, I demonstrate that client switching costs make it optimal for a firm with large market share to invest more in quality than a firm with small market share. This investment in quality also enables the firm with larger market share to charge a higher price, and to maintain its dominant position.; The second chapter studies merger advisory fees paid by acquiring firms. The focus of this chapter is to evaluate the costs and benefits of along term investment banking relationship.; I test two alternate hypothesis on the effect of a prior relationship on fess charged---namely the economies of scale hypothesis and the switching cost hypothesis. Using data on advisory fees paid by acquiring firms, I test these two hypotheses. I find that acquiring firms pay higher fees when they choose an inside advisor and lower fees when they switch. To further examine this finding, I develop a measure of the strength of the relationship between the merger advisor and the acquiring firm. I find that fees also increase in this measure. Both of these are consistent with the switching cost hypothesis. I also find that one of the causes of these costs of switching is quality uncertainty about new banks.; In the third chapter, I examine if the fee paid for a fairness opinion, which is one of the important roles of merger advisors, reflects a premium for legal liability. I find few examples of actual settlements paid out by banks on account of rendering a fairness opinion. However, I find that some proxies for firm-specific risk and transaction risk appear to have a significantly positive effect on this component of the fee. Overall, evidence for legal liability of banks on account of fairness opinions is quite limited.