The information content of target price forecasts: Evidence from mergers and acquisitions

Abstract

This paper investigates the informativeness and value relevance of analyst target prices in the context of mergers and acquisitions. Our results indicate that firms with high 12-month ahead target prices relative to current stock prices are more likely to become a takeover target and offer premium, and acquirers' announcement returns are positively associated with firms' target price premium. We also show that a long-short trading strategy formed on target prices and firms' takeover likelihood generates economically significant returns. Our results are robust to a battery of additional analysis, and the informativeness of target prices is not subsumed by other analyst forecast outputs such as earnings forecasts and recommendations. Overall, our findings suggest that analysts convey valuable information through target price forecasts, which are useful for participants in the corporate takeover markets.

The impact of takeover anticipation on rival firms

“…We provide rival firm returns in Panel G according to the Informative or Speculative nature of the rumor with respect to the target firm, as informative rumors have been shown to provide underlying justifications and subsequently predict acquisitions, whereas speculative rumors have not (Betton et al., 2018). In a similar manner, the informative nature of firm characteristics such as analyst target prices has been used in predicting future events (Ho et al., 2021).…”