Voluntary Disclosures in Mergers and Acquisitions

Whenever there is a merger between two publicly held companies in the form of a stock transaction, the companies must provide a proxy-prospectus to their shareholders with enough information to vote on the proposed merger. The proxy-prospectus contains mandatory pro forma financial statements as if the firms had merged as of the end of the previous year. Occasionally, the proxy-prospectus contains voluntary, forward-looking information, such as projected earnings per share (EPS) or price-to-earnings (PE) ratios of the combined firm.There are two reasons that management may provide this voluntary forward-looking information: 1) management could be providing an optimistic view of the new firm to persuade the shareholders to vote in favor of the merger or 2) the information could be used to provide a clearer picture to help management reduce the information asymmetry between management and shareholders.This study investigates the factors that increase the likelihood of a merger being completed. Second, this study examines the impact that important reporting incentives and firm characteristics have on whether or not firms choose to voluntarily disclose earnings estimates. Lastly, this study examines earnings forecast bias and the factors related to the accuracy and bias of the voluntarily disclosed earnings estimates.Results indicate that shareholders of bidder firms that are weaker financially are more likely to approve a merger suggesting that shareholders of weaker firms might be trying to get stronger by merging with another firm. Second, bidder firms with stronger financial characteristics and target firms with weaker financial characteristics are more apt to voluntarily disclose earnings estimates. Additionally, for those firms that provided EPS forecasts, the forecasts were positively biased. These findings indicate that management of bidder firms that are stronger financially may use these voluntary EPS forecasts to enhance the future outlook of the firm.Lastly, firms that provided voluntary earnings estimates were examined. Results indicate that firms with stronger corporate governance provided more accurate and less biased EPS forecasts. This suggests that corporate governance, which is in place to protect shareholder rights, is doing its job.