Advisor-hedge fund connections, information flows and deal outcomes in mergers and acquisitions

This paper examines the role of information flows between financial advisors, hedge funds, and bidders in the context of mergers and acquisitions (M&A). Using a sample of 2,117 U.S. public M&A transactions from 2000 to 2019, we analyse the impact of investment banks' prime-brokerage connections to hedge funds on deal outcomes. Holdings by connected hedge funds that unexpectedly take stakes in target firms one quarter before deal announcements are associated with lower deal premiums, particularly for targets characterized by high information asymmetry. This impact is less pronounced when the probability that a hedge fund independently identifies a merger target is higher. Such holdings also lead to lower target abnormal returns but have no effect on long-term performance.