This study examines the conditions in which professional firms use client engagements to get clients to subsequently hire them. The central thesis is that professional firms derive power from their specialized expertise and lead clients towards complex problems that apply the expertise. In particular, relative to cash-financed acquisitions, stock-financed acquisitions more intensively apply investment banks' expertise. Consistent with expectations, results from a sample of 404 acquisitions show that firms are more likely to hire banks on stock-financed acquisitions when they have previously used banks. Evidence also suggests that clients that hire banks on such acquisitions are prone to adverse performance from them. Overall, these results suggest that professional firms lead clients to complex solutions with problematic outcomes.
- Sociology of professional firms