Financial Analyst Coverage, Method of Payment and Wealth Effects in M&As

Abstract

This study investigates the impact of the combining companies’ financial analyst coverage in mergers and acquisitions (M&As). By analysing both the M&A payment consideration as well as the wealth effects, we unravel the apparent contradiction between the early theoretical models describing the risk-reducing benefits of stock swaps and conflicting recent empirical findings. Our empirical results for a sample of 1762 M&A announcements during 1994-2011 show that low target analyst coverage incites more cash offers and leads to significantly higher abnormal acquirer returns. Furthermore, acquirer shareholders gain a significantly larger fraction of the total M&A gains if the target company is covered by a relatively low number of analysts. These results hold in subsamples of all-cash or all-stock offers. Finally, we demonstrate that acquirer analyst coverage mitigates market-timing behaviour in M&As. A high number of analysts following the acquirer limits the use of stock payments and reduces the negative impact of stock swaps on bidder announcement returns.