| Managers' public projections of synergistic cash flows from mergers have become increasingly common during the 1990s. This thesis, divided in three chapters, represents the first large sample study of insiders' forecasts of merger-related cash flows.; In Chapter 1, I analyze the sample characteristics of the gains implied by managers' projections and study their relation with merging firms' stock price reaction to merger announcements. I find a significant and positive association between them, consistent with the existence of real synergistic gains. Nonetheless, the implied capitalization rate is arguably low, consistent with bidder insiders being overly optimistic. Supporting this conclusion, I show that, when releasing optimistic projections is costly, as it is for regulated utilities, incremental synergies forecasts are capitalized, at least, dollar for dollar. Moreover, I discuss and test numerous other reasonable explanations for the reportedly low capitalization rates. Overall, the evidence indicates that the apparent optimism in managers' forecasts is robust to controlling for the alternatives.; Despite the increase in the frequency of synergies forecasts over the 1990s, these are available for only 18% of the deals in my sample. In Chapter 2, I investigate the factors affecting bidders' decision to disclose synergies forecasts and its role in the merger process. The analysis shows that bidders trade off costs and benefits of releasing forecasts to meet investors' demand for information. Furthermore, consistent with the existence of "synergies-marketing campaigns", disclosure incentives are correlated across competing bidders. Perhaps more importantly, own and competing synergies forecasts affect the likelihood of an offer success.; Finally, in Chapter 3, I discuss and test the hypothesis that bidder managers' optimism is driven by the need to win (target and bidder) shareholders' approval. I argue that the net benefits of releasing overly optimistic projections of merger related gains are lower when the proportion of equity in the offer is lower, the target market capitalization is lower relative to the bidder, and bidder insiders hold larger equity stakes. The evidence shows that bidder insiders' forecasts are discounted less in these cases, supporting my predictions. These results are robust to controlling for the potential endogeneity of insiders' forecasts. |
