Do Firms Learn from Pre‐announcement Experience? Evidence from Optimistic Pre‐announcements and Market Responses

SYNOPSIS I examine whether firms strategically classify earnings components when reporting bad earnings news. Specifically, I examine whether firms reporting small earnings shortfalls allocate profits across their business segments in a manner that understates the future implications and within-firm drivers of disappointing earnings performance. I find that firms reporting small earnings shortfalls transfer profits toward segments in which profit rates are more informative for firm value and away from segments that operate in industries with higher frequencies of bad earnings news. In addition, I find that shortfall shifting initially tempers negative market responses to shortfall news, but pricing effects reverse in the months following shortfall announcements. My findings suggest that firms strategically classify earnings components when reporting small earnings shortfalls and that strategic classifications temporarily affect the pricing of shortfall news. Data Availability: Data are available from public sources identified in this paper.

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Heterogeneous Market Responses and the Listing Effect in M&A

Quarterly Journal of Finance ◽

10.1142/s2010139212500073 ◽

2012 ◽

Vol 02 (02) ◽

pp. 1250007 ◽

Cited By ~ 2

Author(s):

Qingzhong Ma ◽

David A. Whidbee ◽

Wei Zhang

Keyword(s):

Asymmetric Information ◽

Relative Size ◽

Conventional Approach ◽

Omitted Variables ◽

Market Responses ◽

Monitoring Mechanism ◽

Method Of Payment ◽

Pooled Samples

Unlisted acquisitions differ from listed ones in three important aspects: the possibility of forming blockholders, which substitute debt as a monitoring mechanism; the liquidity discount, which mitigates managerial hubris; and the distinct deal process through which two-sided asymmetric information is revealed. Due to these differences, same firm and deal characteristics could induce heterogeneous market responses, depending on the target listing status. We find that such heterogeneous responses exist in usual characteristics such as method of payment, relative size, acquirer size, leverage, and market-to-book ratios. After these heterogeneous responses are incorporated, the puzzling "listing effect" disappears. Our results also indicate that the conventional approach used to investigate pooled samples of listed and unlisted acquisitions is effectively misspecified due to omitted variables.

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