Analyst coverage of acquiring firms and value creation in cross-border acquisitions

We analyze cross-border acquisitions (CBAs) in the context of growth options by investigating the shareholder wealth effects of acquirers and targets and changes in financial analysts’ earnings forecasts for acquiring firms announcing CBAs. Our sample of 16,435 global CBAs over the 1984–2008 period is conditional on acquirers being followed by financial analysts. We find that for developed country acquirers with developed country targets, there is a statistically significant positive announcement CAR for acquirer firms, for the combined (acquirer and target) firms, and a significant post-CBA increase in the earnings forecast for the acquiring firms. However, the announcement CARs for developed country acquirers with developing country targets, and for developing country acquirers with targets in any country are not significant. In the analysis of earnings forecasts, we find that for all acquirers, the post-CBA median consensus earnings forecast is significantly higher than the pre-CBA forecast. Our results suggest that CBAs are a means by which acquirers exercise value creating growth options, but only in the case when developed country acquirers buy developed country targets.