Expectation Management in Mergers and Acquisitions

Jie (Jack) He (), Tingting Liu (), Jeffry Netter () and Tao Shu ()
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Jie (Jack) He: Department of Finance, Terry College of Business, University of Georgia, Athens, Georgia 30602;
Tingting Liu: Finance Department, Ivy College of Business, Iowa State University, Ames, Iowa 50011;
Jeffry Netter: Department of Finance, Terry College of Business, University of Georgia, Athens, Georgia 30602;
Tao Shu: Department of Finance, Terry College of Business, University of Georgia, Athens, Georgia 30602; Shenzhen Finance Institute, School of Management and Economics, The Chinese University of Hong Kong, Shenzhen 518172

Management Science, 2020, vol. 66, issue 3, 1205-1226

Abstract: Takeover bidders in stock-for-stock mergers have strong incentives to increase their own premerger stock prices to lower their acquisition costs. We find that before announcements of stock mergers, bidders manage down analyst earnings forecasts prior to earnings releases. Such expectation management benefits bidders by increasing their own stock prices and saving on acquisition costs. Additionally, analysts who have close relations with stock bidders are more likely to participate in expectation management. For identification, we use an instrumental variable analysis, a pseudo-event analysis, and a propensity score-matching approach. Our paper provides evidence on expectation management as a previously underexplored opportunistic behavior by takeover bidders.

Keywords: expectation management; method of payment; mergers and acquisitions; acquisition costs; earnings surprises (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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