Rational expectations,analysts' forecasts of earnings and sources of value gains for takeover targets |
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| Affiliation: | 1. Appalachian State University, Walker College of Business, Department of Accounting, Boone, NC 28608, United States;2. West Virginia University, College of Business and Economics, Department of Accounting, Morgantown, WV 26506, United States;3. Sam Houston State University, College of Business Administration, Department of Accounting, Huntsville, TX 77341, United States |
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| Abstract: | Value gains to target firm shareholders in takeover bids may be due to potential synergy between bidder and target and/or potential target restructuring based on new information released by the bid. Since these two models have different implications for the anticipated earnings of the target as a stand-alone entity, analysts' earnings forecast revisions (AFR) for the target during the bid may provide evidence for the new information hypothesis. For 326 UK targets of takeover bids during 1987–1993, we estimate analysts' earnings forecast revisions using the Institutional Brokers Estimate System (IBES) and relate them to bid premia paid to target shareholders. Analysts revise their forecasts significantly up on bid announcement. For failed, especially failed hostile, bids, the earnings forecast revision and bid premium are more positively correlated than for successful and friendly bids. This is consistent with the rational expectations behaviour of target shareholders modelled by Grossman and Hart [S.J. Grossman, O.D. Hart, Bell Journal of Economics 11(1) (1980) 42; S.J. Grossman, O.D. Hart, Journal of Finance 36 (1981) 253]. |
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