Do acquirers disclose good news or withhold bad news when they finance their acquisitions using equity?

Abstract

Companies that use their own stock to finance acquisitions have incentives to increase their market values prior to the acquisition. This study examines whether such companies mislead investors by issuing overly optimistic forecasts of future earnings (''deception by commission'') or by withholding bad news about future earnings (''deception by omission''). We compare the management forecasts of acquiring firms in a pre-acquisition period (days -90 to -30 before the acquisition announcement) and a post-acquisition period (days ?30 to ?90 after the acquisition is completed). We show that, when acquisitions are financed using stock, companies are not more likely to issue overly optimistic earnings forecasts during the pre-acquisition period compared with the postacquisition period. However, these same acquirers are more likely to withhold impending bad news about future earnings. Consistent with litigation having an asymmetric effect on disclosure incentives, our findings suggest that deception by omission occurs more often than deception by commission.

Credit Ratings and Managerial Voluntary Disclosures

“…I investigate this as an exploratory analysis. Following prior literature (e.g., Noe, ; Cheng and Lo, ; Brockman, Khurana and Martin, ; Nichols, ; Ge and Lennox, ), I measure the nature of disclosure news by the announcement returns over its three‐day event window.…”

“…This study contributes to the literature in several ways. First, prior literature investigates the impact of managerial incentives on corporate disclosures in the setting of equity offerings (Frankel, McNichols and Wilson, ; Marquardt and Wiedman, ; Lang and Lundholm, ; Kim, ), stock repurchases (Brockman, Khurana and Martin, ), management buyout offers (Hafzalla, ), stock‐for‐stock mergers (Ge and Lennox, ), stock and stock option grants (Aboody and Kasznik, ; Nagar, Nanda, and Wysocki, ), and insider trading (Bushman and Indjejikian, ; Rogers and Stocken, ; Cheng and Lo, ; Rogers, ; Cheng, Luo and Yue, ). Nevertheless, despite the importance of credit rating to a firm, little research attention has been paid to managers’ use of voluntary disclosures to influence credit ratings.…”

“…The classification of news type for voluntary disclosures pertains to a subjective judgment on which reasonable researchers/practitioners hold different perspectives and could reasonably disagree to a substantive extent. Therefore, following Noe (), Cheng and Lo (), Brockman, Khurana and Martin (), Ge and Lennox (), and Nichols (), among others, I use stock market reactions to identify the news type of disclosures.…”

Disclosure Regulation and Corporate Acquisitions

“…Other papers document strategic reporting and disclosure around acquisitions. For example, Ge and Lennox [2011] document that acquirers disclose good news or withhold bad news when they finance their acquisitions using equity, and Kim, Verdi, and Yost [2018] show that acquirers strategically disseminate news that can depress the target's stock price. All these studies focus on voluntary disclosure and reporting and thus, unlike our paper, they do not explore the effect of disclosure regulation on the takeover market.…”

Do market predictions affect its reaction to UK listed industrial firms' corporate refocusing announcements?

“…An extensive body of literature infers that managers strategically time information disclosures according to different scenarios; i.e. they have a tendency to release good news earlier than bad news: (i) if the disclosure related cost is high (Kothari, Shu and Wysochi, 2009); (ii) if there is high information asymmetry between themselves and the investors (Dye, 1985;Jung and Kwon, 1988); and (iii) when they use their firms' shares to finance acquisitions (Ge and Lennox, 2011). However, managers may choose to release bad news earlier if they wish to (1) control investors' expectations and meet the earnings targets of analysts (Zuckerman, 2000), or (2) release bad news before undertaking a share buyback in order to push down the share price (Chen and Lo, 2006).…”