Bidder Earnings Forecasts in Mergers and Acquisitions

We provide evidence on the benefits and costs of pro-forma earnings forecasts by bidding firms during acquisitions. We find that these forecasts are associated with a higher likelihood of deal completion, expedited deal closing, and with a lower acquisition premium − but only in stock-financed acquisitions. Our results are most consistent with forecast disclosure positively affecting the value perceptions of target shareholders persuading them to agree to acquisitions with stock. Our findings reveal that the effects of these public disclosures are stronger when private communication with target shareholders is more constrained. However, benefits of forecast disclosure only accrue to bidders that have built a credible forecasting reputation prior to the acquisition. Explaining why not all bidders forecast, we provide evidence on high forecasting costs, namely higher likelihood of post-merger litigation and CEO turnover, particularly for bidders with a weak forecasting reputation and for those that underperform post-merger