How do investors respond to targets' interim earnings?

Gunn, Rita
Pierce, Spencer
Romney, Miles
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Fundamental to the accounting literature is that firms’ stock prices relate positively to their earnings news. We examine a setting where investors may be unsure to which firm the announced earnings accrue: earnings announced by acquisition targets between the announcement and completion of the acquisition. We find that targets’ stock prices relate positively to their unexpected earnings during this interim period, but only for unsuccessful deals. For completed deals, we fail to find evidence that the target’s or acquirer’s stock prices respond to the target’s unexpected interim earnings at the time of announcement. However, we find that targets’ interim earnings predict future abnormal returns of the combined firm following deal completion. These returns are economically significant as a trading strategy based on targets’ interim earnings produces annualized abnormal returns of 8.3%. Our findings suggest that investors respond inefficiently to the earnings that targets announce between announcement and completion of acquisitions.
Earnings, Mergers and Acquisitions, Investor Inattention, Investor Inefficiency
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