Lower the Basket for Easy Shots? Expectation Management Before Takeovers

Abstract

There is a large literature analyzing the different, and sometimes conflicting, goals of various parties in mergers and acquisitions. While it is well known that bidders in stock-for-stock mergers have a strong incentive to boost their own pre-merger stock prices to lower the acquisition costs, the role played by financial analysts in the takeover process is underexplored. We find strong evidence that analysts adjust downward their near-term earnings forecasts for stock bidders prior to merger announcement, and such forecast adjustment helps bidders ensure good earnings surprises, support stock prices, and save on acquisition costs. This finding is robust to alternative measures of forecasts, and cannot be explained by firm and deal characteristics or omitted variables. Further analyses reveal that the forecast adjustment reflects conflicts of interest instead of analysts’ truthful opinions. Overall, our paper suggests that the downward adjustment of analyst forecasts is a surprising yet robust feature of the stock mergers.