Information Asymmetry/ Uncertainty and M&A Performance

Abstract

This study contributes to the mergers and acquisitions as well as the informational transparency literature – by examining the relationship between a firm’s analysts' forecast error/ informational uncertainty and M&A outcomes. Contrary to our conventional wisdom, we find that an acquiring firm with more forecast errors and informational uncertainty (firm risk, as expressed by stock return variation) tends to have more favorable abnormal market reactions. Whereas a target firm with more forecast errors and informational uncertainty tends to have less favorable abnormal market reactions. As the relation between acquirer forecast errors and informational uncertainty looks counter-intuitive, we further delve into this issue. We find that, in general, firms with higher analysts' forecast errors and informational uncertainty tend to make fewer acquisitions, which implies that firms with lower informational quality are more selective in their acquisitions. Further, we find that the positive relationship between forecast error/ informational uncertainty and CAR is primarily driven by non-public target acquisitions. In the sub-sample analyses - where we consider only public target firms, our results show that acquirers with higher forecast errors and uncertainty end up acquiring targets with higher forecast errors and weaker firm performance. These findings offer some plausible explanation for the non-significant relation between acquirer analysts' forecast errors/ informational uncertainty and M&A market reactions. It appears that market participants are less enthusiastic about public target acquisitions by acquirers with more inferior informational quality.