How Do Investors Respond to Targets’ Interim Earnings?

Vanderbilt Owen Graduate School of Management Research Paper

The Accounting Review, (doi.org/10.2308/TAR-2022-0327) Forthcoming

52 Pages Posted: 25 Apr 2023 Last revised: 4 Aug 2023

See all articles by Rita Gunn

Rita Gunn

University of Virginia - Darden School of Business

Spencer Pierce

Florida State University - College of Business

Miles A. Romney

Florida State University - College of Business

Date Written: April 17, 2023

Abstract

Fundamental to the accounting literature is that firms’ stock prices relate positively to their earnings news. We examine a setting where investors may be unsure to which firm the announced earnings accrue: earnings announced by acquisition targets between the announcement and completion of the acquisition. We find targets’ stock prices relate positively to their unexpected earnings during this interim period, but only for unsuccessful M&A deals. For completed deals, we fail to find that targets’ or acquirers’ stock prices respond to targets’ unexpected interim earnings at the time of announcement. However, we find that targets’ interim earnings predict future returns of the combined firm following deal completion. A trading strategy based on targets’ interim earnings produces economically significant annualized abnormal returns of 7.25%. Our findings suggest investors respond inefficiently to the earnings that targets announce between the announcement and completion of acquisitions.

Keywords: Earnings, Mergers and Acquisitions, Investor Inattention, Investor Inefficiency

JEL Classification: M40, M41, G34

Suggested Citation

Gunn, Rita and Pierce, Spencer and Romney, Miles A., How Do Investors Respond to Targets’ Interim Earnings? (April 17, 2023). Vanderbilt Owen Graduate School of Management Research Paper, The Accounting Review, (doi.org/10.2308/TAR-2022-0327) Forthcoming, Available at SSRN: https://ssrn.com/abstract=4421469 or http://dx.doi.org/10.2139/ssrn.4421469

Rita Gunn

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Spencer Pierce (Contact Author)

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

Miles A. Romney

Florida State University - College of Business ( email )

Tallahasse, FL 32306
United States

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