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Accuracy of Analysts' Earnings Forecasts: Evidence from Mergers and Acquisitions in Australia

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Author Info

  • Janice C. Y. How
  • Yion K. Phung
  • Peter Verhoeven

    ()
    (Department of Accounting and Finance, The University of Auckland, Australia)

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    Abstract

    As the incidence of mergers and acquisitions (M&As) continues to escalate, understanding the factors that systematically affect earnings predictability becomes increasingly important. This paper examines how changes in business characteristics and forecasting environment of merging firms affect the accuracy of consensus analysts' earnings forecasts in Australia. Based on a sample of 99 M&As from 1998 to 2000, the results show that the forecast error increases after an M&A. The increase in the forecast error appears to persist for at least the first three years after the merger, suggesting that analysts take time to adjust to changes in the firm brought about by an M&A. The change in analysts' forecast errors is related to variables proxying the change in the complexity of the merging firms.

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    File URL: http://web.usm.my/journal/aamjaf/vol1/1-4.pdf
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    Bibliographic Info

    Article provided by Penerbit Universiti Sains Malaysia in its journal Asian Academy of Management Journal of Accounting and Finance.

    Volume (Year): 1 (2005)
    Issue (Month): 1 ()
    Pages: 67-80

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    Handle: RePEc:usm:journl:aamjaf00101_67-80

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    Web page: http://web.usm.my/aamj/
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    Related research

    Keywords: mergers and acquisitions; analysts; consensus forecast error;

    References

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    1. Lobo, Gerald J., 1992. "Analysis and comparison of financial analysts', time series, and combined forecasts of annual earnings," Journal of Business Research, Elsevier, vol. 24(3), pages 269-280, May.
    2. Bhushan, Ravi, 1989. "Firm characteristics and analyst following," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 255-274, July.
    3. Brown, Lawrence D & Rozeff, Michael S, 1978. "The Superiority of Analyst Forecasts as Measures of Expectations: Evidence from Earnings," Journal of Finance, American Finance Association, vol. 33(1), pages 1-16, March.
    4. Bhushan, Ravi & Cho, Jang Y, 1996. "Acquisitions and the Information Environment of Firms," The Financial Review, Eastern Finance Association, vol. 31(1), pages 105-25, February.
    5. Brown, Lawrence D. & Hagerman, Robert L. & Griffin, Paul A. & Zmijewski, Mark E., 1987. "An evaluation of alternative proxies for the market's assessment of unexpected earnings," Journal of Accounting and Economics, Elsevier, vol. 9(2), pages 159-193, July.
    6. Brown, Philip & Clarke, Alex & How, Janice C. Y. & Lim, Kadir J. P., 2002. "Analysts' dividend forecasts," Pacific-Basin Finance Journal, Elsevier, vol. 10(4), pages 371-391, September.
    7. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    8. Pound, John, 1988. "The information effects of takeover bids and resistance," Journal of Financial Economics, Elsevier, vol. 22(2), pages 207-227, December.
    9. Erwin, Gayle R. & Perry, Susan E., 2000. "The effect of foreign diversification on analysts' prediction errors," International Review of Financial Analysis, Elsevier, vol. 9(2), pages 121-145.
    10. Christie, Andrew A., 1987. "On cross-sectional analysis in accounting research," Journal of Accounting and Economics, Elsevier, vol. 9(3), pages 231-258, December.
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