Bidder Earnings Forecasts in Mergers and Acquisitions

Abstract

This study finds that pro-forma earnings forecasts by bidding firms during acquisitions are associated with a higher likelihood of deal completion, expedited deal closing, and with a lower acquisition premium − but only in stock-financed acquisitions. Analysts also respond to these forecasts by revising their forecasts for the bidder upward. However, the benefits of forecast disclosure only accrue to bidders with a strong forecasting reputation prior to the acquisition. Explaining why not all bidders forecast, we document a higher likelihood of post-merger litigation and CEO turnover for bidders with a weak forecasting reputation and for those that underperform post-merger.

Keywords: management earnings forecasts, mergers, acquisitions, voluntary disclosures, merger forecasts, earnings per share, accretion, dilution

JEL Classification: D82, G14, G34, M41