Forecasts of Earnings by Takeover Bidders
66 Pages Posted: 30 Jul 2008 Last revised: 17 Mar 2009
Date Written: December 27, 2008
The paper analyzes the earnings forecasts issued by bidders' executives in the biggest deals announced on the New York Stock Exchange in the years 1998-2001. It explores the role of the forecasts as an information source for investors at the time of the bid announcement. We investigate the different types of forecast made - precise point forecasts and more general directional forecasts - and the characteristics of the various types of forecaster. We compare forecast with out-turn. The majority of bidders fail to deliver their projections in earnings growth and there is evidence of systematic misjudgement about the future outcome of the proposed acquisitions. We explore the sources of management forecast error and find evidence of managerial over-optimism after controlling for exogenous economic shocks in earnings. Then the paper considers the relationship between forecasts and stock returns at announcement and presents prima facie evidence of market inefficiencies. We develop a model using publicly available information at the time of the bid which is able to explain a major source of the forecast error variance and which discriminates between successful and unsuccessful acquisitions. Finally, the paper analyzes the motives for forecasting, in particular its role in the pricing of bids and the competition for control.
Keywords: merger, acquisition, management earnings forecasts, disclosure
JEL Classification: G11, G14, G34, M41, M45
Suggested Citation: Suggested Citation