Expectation Management in Mergers and Acquisitions
Management Science, Volume 66, Issue 3, Pages 1205-1226, 2020
49 Pages Posted: 15 Oct 2014 Last revised: 24 May 2021
Date Written: August 14, 2018
Takeover bidders in stock-for-stock mergers have strong incentives to increase their own pre-merger stock prices to lower their acquisition costs. We find that before announcements of stock mergers, bidders manage down analyst earnings forecasts prior to earnings releases. Such expectation management benefits bidders by increasing their own stock prices and saving on acquisition costs. Additionally, analysts who have close relations with stock bidders are more likely to participate in expectation management. For identification, we use an instrumental variable analysis, a pseudo-event analysis, and a propensity score matching approach. Our paper provides evidence on expectation management as a previously underexplored opportunistic behavior by takeover bidders.
Keywords: Expectation management, stock-for-stock mergers, acquisition costs, conflicts of interest, earnings surprises
JEL Classification: G34, G24
Suggested Citation: Suggested Citation