Do Acquirers Disclose Good News or Withhold Bad News When They Finance Their Acquisitions Using Equity?
Review of Accounting Studies, Vol. 16, pp. 183-217, 2011
Posted: 28 Aug 2011
Date Written: August 26, 2011
Companies that use their own stock to finance acquisitions have incentives to increase their market values prior to the acquisition. This study examines whether such companies mislead investors by issuing overly optimistic forecasts of future earnings (“deception by commission”) or by withholding bad news about future earnings (“deception by omission”). We compare the management forecasts of acquiring firms in a pre-acquisition period (days -90 to -30 before the acquisition announcement) and a post-acquisition period (days 30 to 90 after the acquisition is completed). We show that, when acquisitions are financed using stock, companies are not more likely to issue overly optimistic earnings forecasts during the pre-acquisition period compared with the postacquisition period. However, these same acquirers are more likely to withhold impending bad news about future earnings. Consistent with litigation having an asymmetric effect on disclosure incentives, our findings suggest that deception by omission occurs more often than deception by commission.
Keywords: Disclosure, Deception, Acquisitions, Management Forecasts
JEL Classification: D21, D83, M41
Suggested Citation: Suggested Citation