Merger Means of Payment and Analyst's Forecast Bias Before Merger Announcement Date

Abstract

We find strong evidence that analysts tend to have downward-biased earnings estimates immediately before merger announcement dates when earning announcement date is within a 60 day window prior to merger announcement date. Compared to pure stock deals, acquirer stocks in cash-only deals tend to experience a more pronounced positive earnings surprise on the earning announcement date in the above time frame. An event study within three days window of earning announcement date that is within 60 days prior to M&A announcement date allows us to capture market price reaction toward means of payment impact on near term analysts’ forecast bias. We find 0.72% (0.43%) cumulative abnormal return for the acquirer stocks of cash only (Pure stock) deals during this specific time frame. Our findings complement the analyst’s conflict of interest hypothesis, suggesting analyst’s earnings forecast right before merger announcements may be influenced by merger means of payment.