Merger Means of Payment and Analyst Biases around Merger Announcement Date

Abstract

I find strong evidence that analysts report downward-biased earnings estimates on acquiring firms when the earnings announcement date is within a 60-day window prior to the merger and acquisition (M&A) announcement date. Acquiring firm stocks have a greater positive realized forecast error in cash only transactions on the earnings announcement date compared to acquirers involved in pure stock transactions. In addition, analysts are more likely to upgrade their recommendations of acquirer stocks in cash only transactions compared to pure stock transactions within a 90 day window of the M&A announcement date. Finally, an increase in the market-to-book ratio leads to a decrease in realized target stock forecast error between the merger announcement date and the merger effective date, or between the merger announcement date and the merger withdrawal date. Changes in the average realized forecast error associated with large market-to-book ratios are greater under pure stock transactions between the merger announcement date and the merger effective date, or between the merger announcement date and the merger withdrawal date. This study highlights the significant impact of M&A transaction characteristics of M&A transactions on the near term analysts’ realized forecast errors around the merger announcement date.