(Dis)aggregated earnings forecasts and acquisition financing

Abstract

Purpose

The purpose of this paper is to examine how a firm’s mergers and acquisitions (M&A) goals influence its voluntary disclosure policy. Specifically, this paper examines how a firm’s M&A financing intentions influence the degree of aggregation in management guidance prior to and after the M&A transaction.

Design/methodology/approach

Using a logistic model, this study tests the relation between M&A financing and the decision to issue disaggregate earnings guidance for 3,929 acquiring firms from 2007 to 2011.

Findings

The logistic regression results show that firms are more likely to provide disaggregate earnings guidance when using mostly stock to finance M&A and that the incentives to disaggregate guidance vary throughout the M&A transactional window. Alternatively, because the value of cash is independent of the true value of the acquirer, the results show that firms offering mostly cash to finance M&A are less likely to issue disaggregate earnings forecasts. Additional analysis reveals that the decision to issue disaggregate earnings guidance also influences post-merger outcomes such as CEO turnover.

Research limitations/implications

The choice to disaggregate earnings guidance and the choice to use stock as a means to finance an acquisition is made by management, thus are endogenous which could introduce bias.

Originality/value

This study provides insights into management’s incentives and attitudes toward the use of management forecasts to effect a potential merger and acquisition. Given the flexibility management has in issuing voluntary forecasts, management can tailor a financial message toward investors and potential targets in attempt to facilitate a merger and acquisition and to further the firm’s goals.

Citation

Ordyna, P. (2020), "(Dis)aggregated earnings forecasts and acquisition financing", Asian Review of Accounting, Vol. 28 No. 2, pp. 255-271. https://doi.org/10.1108/ARA-03-2019-0077