ABSTRACT
This chapter analyses the earnings forecasts issued by bidders’ executives in large US takeovers announced in the years 1990–2006. It explores the role of the forecasts as an information source for investors at the time of the bid announcement. We investigate the different types of forecast made – precise point forecasts and more general qualitative forecasts – and the characteristics of the various types of forecaster, comparing forecast with out-turn. The majority of bidders fail to deliver their projections in earnings growth, and there is evidence of a positive bias in management forecasts of future earnings of the combined firm. We analyse the motives for forecasting, in particular the determinants of forecasting choices. Finally, we explore the relationship between forecasts and stock returns at announcement and present evidence of market inefficiencies. This study contributes to two literatures: one on managers’ motivation for voluntary disclosure of forward-looking information such as earnings forecasts and synergy estimates, and the other on identifying successful mergers at the time of the bid.
