Do acquirers disclose good news or withhold bad news when they finance their acquisitions using equity?

Rui Ge and Clive Lennox ()
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Rui Ge: Sun Yat-sen University
Clive Lennox: Nanyang Technological University

Review of Accounting Studies, 2011, vol. 16, issue 1, No 7, 183-217

Abstract: Abstract Companies that use their own stock to finance acquisitions have incentives to increase their market values prior to the acquisition. This study examines whether such companies mislead investors by issuing overly optimistic forecasts of future earnings (“deception by commission”) or by withholding bad news about future earnings (“deception by omission”). We compare the management forecasts of acquiring firms in a pre-acquisition period (days −90 to −30 before the acquisition announcement) and a post-acquisition period (days +30 to +90 after the acquisition is completed). We show that, when acquisitions are financed using stock, companies are not more likely to issue overly optimistic earnings forecasts during the pre-acquisition period compared with the post-acquisition period. However, these same acquirers are more likely to withhold impending bad news about future earnings. Consistent with litigation having an asymmetric effect on disclosure incentives, our findings suggest that deception by omission occurs more often than deception by commission.

Keywords: Disclosure; Deception; Acquisitions; Management forecasts (search for similar items in EconPapers)
JEL-codes: D21 D83 M41 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/s11142-010-9139-y

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