The Effect of Quarterly Earnings Guidance on Share Values in Corporate Acquisitions

Posted: 18 Oct 2012  

Adam S. Koch

University of Virginia - McIntire School of Commerce

Craig E. Lefanowicz

University of Virginia - McIntire School of Commerce

John R. Robinson

Texas A&M University

Date Written: 2012

Abstract

We investigate whether quarterly earnings guidance by corporate takeover targets is associated with acquisition premiums. Regulators have expressed recurring concerns that quarterly guidance is associated with a misallocation of resources because it encourages management to focus on excessively short-term horizons. If so, firms providing quarterly guidance represent an acquisition opportunity for non-guiding firms because acquired resources can be redeployed towards more productive long-term uses. Based on prior research that finds value created by acquisitions accrues primarily to target shareholders, we predict that an expected increase in value from the termination of guidance will be observed in acquisition premiums. We find that, after controlling for the other determinants of acquisition gains, the premium paid for an acquired corporation is associated with the target’s practice of issuing quarterly earnings guidance. Consistent with our prediction, we find that no incremental premium is paid to acquire guiding targets when the bidding firm also provides guidance.

Keywords: Earnings Guidance, Acquisition Premiums, Management Myopia, Mergers and Acquisitions

JEL Classification: M41, G34

Suggested Citation

Koch, Adam S. and Lefanowicz, Craig E. and Robinson, John R., The Effect of Quarterly Earnings Guidance on Share Values in Corporate Acquisitions (2012). Journal of Corporate Finance, Vol. 18, No. 5, 2012. Available at SSRN: https://ssrn.com/abstract=2163560

Adam S. Koch (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Craig E. Lefanowicz

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-924-6356 (Phone)

John R. Robinson

Texas A&M University ( email )

mail stop 4353
Mays School of Business
college state, TX 77843-4353
United States
979-845-3457 (Phone)
979-845-0028 (Fax)

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