Does Motivated Reasoning Affect the Informativeness of Management Guidance following an Acquisition?

Abstract

Management guidance is an important disclosure mechanism in periods following an acquisition, as post-acquisition guidance influences expectations about the newly-created firm’s future earnings and performance. I examine the bias and informativeness of post-acquisition earnings guidance and find that managers are more likely to issue overly optimistic guidance following an acquisition than they are in non-acquisition periods. Post-acquisition optimism increases with the relative size of the acquisition but does not vary with strategic incentives, consistent with motivated reasoning influencing managers’ decision making. I also find guidance informativeness varies after an acquisition, conditional on guidance characteristics. Specifically, analysts use the information in post-acquisition guidance less than non-acquisition guidance when it contains goods news or is optimistic but more when post-acquisition guidance contains bad news. Overall, these findings reveal important behavioral changes in management guidance following acquisitions.

Keywords: management earnings guidance, acquisitions, motivated reasoning, analysts’ forecasts

JEL Classification: G17, M41