Researchers have examined investment bank incentives in M&A by analyzing management buyouts, as these deals are “particularly rife in conflicts of interest,” they say in a recent paper. The banks “use significantly higher COE [cost of equity] values in management buyout deals, which potentially underestimates target value to make the proposed bid more attractive for target shareholder approval,” the paper says. They also found that investment banks do not look to CAPM or the Fama-French models to estimate COE but use several proxies for risk, including industry effects, beta, size, and illiquidity as well as past returns, financial distress, and volatility. The paper is “The Cost of Equity: Evidence From Investment Banking Valuations,” by Gregory W. Eaton (Oklahoma State University), Feng Guo, Tingting Liu, and Danni Tu (Iowa State University), and is available if you click here .