Analyst Sentiment Around Takeover Announcements
37 Pages Posted: 21 Mar 2006
Date Written: February 2006
This paper studies the sentiment among financial analysts around announcements of mergers and acquisitions (M&As). Analyst sentiment is measured using revisions of consensus earnings forecasts. We find that bidders are more likely to offer stock rather than cash in their takeovers when analyst sentiment is more favorable prior to their takeover announcements. However, the favorable sentiment on stock bidders experiences a downward swing subsequent to takeover announcements. The industry peers of stock bidders also face more favorable pre-announcement analyst sentiment than the industry peers of cash bidders. Unlike the firm-specific sentiment on stock bidders, the industry-wide sentiment persists even after bidders announce their takeovers. Finally, we find that stock bidders and their industries face more favorable analyst sentiment compared to targets and their industries prior to takeover announcements. Our evidence on analyst sentiment in M&As is consistent with inefficient market theories such as the investor sentiment explanation in Shleifer and Vishny (2003). But our evidence cannot be fully explained by efficient market theories such as the asymmetric information explanation in Hansen (1987) and Fishman (1989) and the explanations based on earnings management or affiliated analysts' biased forecasts.
Keywords: Analyst Sentiment, M&As
JEL Classification: G34
Suggested Citation: Suggested Citation