Can Analysts Analyze Mergers?

Abstract

After the completion of an M&A transaction, the target firm is delisted but some analysts who covered it retain coverage of the merged firm. We hypothesize that this decision is based on two factors—the analyst’s ability to cover the merged firm and his or her assessment of the M&A deal. Consistent with these hypotheses, we find that the remaining target analysts provide more accurate earnings forecasts and more optimistic stock recommendations and growth forecasts for the merged firms than the remaining acquirer analysts do. We also find that a higher percentage of target analysts choosing to cover the merged firm is associated with better operating and long-run stock performance of that firm, but do not find this relation with acquirer analysts. Our results extend the literature by showing that target analysts’ coverage decisions reveal valuable information about a merged firm’s future performance.

Keywords: Mergers and acquisitions, analyst coverage, investment bank, forecast accuracy, stock performance

JEL Classification: G24, G29, G34