Do Analysts Understand Mergers and Acquisitions? Evidence from Analyst Reports

Project: Research

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Description

Mergers and Acquisitions (M&As) are among the most important corporate events. Yet, investors have consistently complained that the information environment around M&A remains opaque as the financial reporting system generates inadequate signals about the quality of acquisitions. In such an inadequate information environment, the role of analysts as information intermediaries in M&A becomes even more critical. Yet, analysts' role in the information processing of M&A isn't systematically studied. The limited extant literature has focused on short-term summary outputs and suggests that analysts struggle to understand M&As as the earnings forecast error and dispersion increase post-acquisition.The extant literature has three major limitations with regards to answering the following questions- 1) Whether analysts understand M&A, and 2) Whether and in what way analysts contribute towards improving the information environment of M&As. First, the focus on short-term summary measures doesn't allow for investigating whether analysts get the long-term value implications of the transaction. Second, the existing literature doesn't analyze whether the error in short-term summary outputs is driven by the analyst's failure to unravel the economic implication or the reporting complexity of the transaction. Third, the narrow focus on short-term summary output isn't adequate to fully capture whether and how analysts contribute towards improving the information environment around M&A as it excludes one crucial aspect of analysts' output, i.e., the textual content of the analyst reports.In this project, we utilize modern textual analysis techniques to identify discussions around important topics in the context of M&A that analysts cover in their reports. We then use the breadth of discussion and the underlying tone of those topics to infer their understanding of the M&A transactions. Then, we identify the topics investors care about the most by linking market reactions to the quality of coverage of those topics. Finally, we investigate if the information content of their report helps improve the association between short-term market reaction to M&A and the long-term value implication of these transactions.We contribute to the literature on M&A and Analysts by furthering our understanding of whether and how analysts are able to analyze M&A by capturing their understanding of the transactions along two important interrelated dimensions, i.e., time (short-term vs. long-term) and complexity (reporting vs. economic ). Further, we contribute to the literature by investigating if analysts help improve the information environment around M&A, taking into consideration a broader set of their output than previously examined in prior research.

Detail(s)

Project number9043594
Grant typeGRF
StatusActive
Effective start/end date1/10/23 → …