A company’s stock depends on variety of factors, stemming from the market, industry, and the company itself. Merger and acquisitions of any size are one of the biggest-impact events on a firm, most usually impacting their stock value and stock forecasts. The article by Meslmani et al. (n.d.). examines whether merger-specific information is useful and reliable to outsiders and analysts. The stock market goes up and analysts revise forecasts positively, when larger projected synergies are made known, such as cost-savings but not necessarily revenue synergies. Therefore, this suggests that the information environment around mergers and acquisitions is critical and can be managed via voluntary disclosures of merger synergies to affect stock prices and analysist forecasts as outsiders such as analysts and institutional investors have ability to process sophisticated information. The paper aims to answer the research questions on whether merger-specific information is informative to outsider entities and leads to stock analysts to revise forecasts as well as if stock returns are impacted by merger synergy forecasts.
Hypotheses and Discussion
The authors develop their hypotheses based on existing literature. First, it is expected that analysts would react to voluntary management disclosure of synergy and react based on that information. Therefore, for hypothesis I, it is suggested that bidder firms accounting synergy, forecast revisions by analysis is positively related to the size of the synergy. Next, when announcing the forecasted synergy, the source of this synergy is also revealed. Synergies in M&A are due to enhanced operating efficiency, with the market typically reacting to management projections of cost savings as being realistic rather than revenue projections. Therefore, for hypothesis II, “analyst forecast revision is a positive function of the cost savings component of the announced synergy forecast.” Meanwhile, hypothesis III states, “analyst forecast revision is not significantly affected by the revenue enhancement component of the announced synergy forecast.”
Finally, voluntary disclosure of management earnings forecasts has a direct impact on stock prices. Analysist forecast revisions are driven by such information and instigate a stronger market reaction associated with frequent news coverage. Voluntary earnings announcements similarly to bidder firms announcing synergy signals confidence about future operations and that managers are informed about the economic status of a firm, leading to the market to react accordingly. Therefore, hypothesis IV states. “bidder firms exhibit larger abnormal stock returns in response to larger synergy forecasts and stronger analyst forecast revisions” (Meslmani et al., n.d.).
Results and Findings
The researchers find that analysts’ revisions to synergy forecasts and positive revisions lead to larger excess returns, while firms of low level of revisions see smaller returns regardless of synergy forecasts. They determine that management synergy forecasts are informative to the market resulting in excess returns in high synergy portfolios rather than low synergy. The results confirm that analysts use synergy forecasts as a credible source of information about companies’ future. The results also determined that outsiders perceive overconfident CEOs or poorly governed firms as less reliable. However, firms of with stable CEOs, good governance practices, and internal large analysist error, have the positive impact on analysis positively revising forecasts. The authors suggest that analysis rely more on synergy disclosure rather than the M&A announcement itself, but also focus on credibility and reliability of the information and its origin.
Criticism and Limitations
Generally, the research was very in-depth and comprehensive. It used an appropriate methodology and supported its findings empirically. The primary criticism for this paper is that it makes the assumption that analysts’ forecasts around M&A decisions are only based on singular factors, but in reality that are potentially other forces at influence there. For example, rumors and involuntarily disclosed information, industry trends (such as when Microsoft made the bid for Activision Blizzard recently in the video game industry recently, it was expected that Sony would follow), and speculative behavior.
The research and calculations did not seem to account significantly for these factors. Also, the researchers can benefit from applying relevant theories or frameworks related to the topic. For example, there are voluntary disclosure frameworks in place which suggest that discretionary disclosure results from the tradeoff between benefits and costs of the disclosure decision. One limitation that was identified was that the authors did not control for the endogenous nature of the synergy disclosure decision, that may indicate that the bidder-firm abnormal stock returns are influenced as much by the decision itself as well as the magnitude of synergies.
Future research can seek to examine determinants and long-term trajectories of stock price impact of voluntary synergy disclosures. Furthermore, factors can be studied on contexts when firms may choose to or not to disclose synergies and other information, with some existing research indicating that synergy disclosures are more likely for complex M&As in the effort to reduce asymmetric information. Other factors may include managerial incentives and disclosure practices in the industry, which are important to consider. Research into impact on investors is also warranted in exploring why disclosures have become so popularized. When investors understand where the value of a M&A stems from, they are likely to reward the companies with greater investment to solidify such major strategic moves.
In the context of increased frequency of voluntary disclosures on merger synergy forecasts and other M&A information, this paper examines the impact of such information on stock forecasts and markets. It is evident that the internal information stemming from M&As is important and beneficial to outsiders, that can make relatively accurate predictions and allow the market to react accordingly. The conclusion is that management disclosure of merger-related forecasts and information strengthens the information environment in the market surrounding the M&A and benefit stock projections and growth for the firm.
Meslmani, N.E., Ismail, A.K., & Uddin, M.R. (n.d.). Are insiders’ forecasts reliable for outsiders? Evidence from analysts’ reaction to merger synergy projections. Saint May’s University.