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

See all articles by Jie He

Jie He

University of Georgia - Department of Finance

Tingting Liu

Iowa State University

Jeffry M. Netter

Department of Finance; University of Georgia Law School

Tao Shu

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Date Written: August 14, 2018

Abstract

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

He, Jie and Liu, Tingting and Netter, Jeffry M. and Shu, Tao, Expectation Management in Mergers and Acquisitions (August 14, 2018). Management Science, Volume 66, Issue 3, Pages 1205-1226, 2020, Available at SSRN: https://ssrn.com/abstract=2509573 or http://dx.doi.org/10.2139/ssrn.2509573

Jie He (Contact Author)

University of Georgia - Department of Finance ( email )

B318 Amos Hall
Terry College of Business, University of Georgia
Athens, GA 30602-6253
United States

Tingting Liu

Iowa State University ( email )

2330 Gerdin Business Building
Ames, IA 50011
United States

Jeffry M. Netter

Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States
706-542-4450 (Phone)

HOME PAGE: http://www.terry.uga.edu/directory/profile/jnetter/

University of Georgia Law School

225 Herty Drive
Athens, GA 30602
United States

Tao Shu

The Chinese University of Hong Kong, Shenzhen ( email )

Shenzhen Finance Institute ( email )

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