How M&A Delistings Affect the Quality of Information About Peer Firms

Over the last 25 years, the number of publicly traded firms in the U.S. has decreased by approximately half, primarily because of delistings that result from mergers and acquisitions. Does this trend have potential consequences for the capital markets? In a forthcoming study, we find evidence that it does: a decrease in the quality of information about industry peers.

Our sample starts with 815 M&A delistings. We examine whether they are associated with a change in the quality of sell-side financial analysts’ information about firms in the same industry as the target firms that delist. These analysts have an incentive to be accurate in their forecasts, and so it is safe to assume that they will use all available information to that end. If we observe that analysts have larger forecasting errors (or the forecasts are more widely dispersed), then we can conclude that, on average, analysts had lower-quality information when they issued their forecasts.

Specifically, we examine whether the delistings in our sample are associated with an increase in analysts’ forecasting errors (and forecast dispersion) for industry peers during six quarters before and after these delistings in the same industry. Using a sample of over 200,000 peer-firm quarters, we find that, on average, these delistings are associated with significant increases in analysts’ absolute forecasting errors and dispersion for peer industry firms that last for up to six quarters after the delisting. This indicates that M&A delistings are associated with a decline in the quality of information sell-side financial analysts possess about industry peers, i.e., there is a negative information externality associated with M&A delistings that affects the capital markets. Additionally, this effect is larger when the delisted target firm is likely to contribute more to the overall amount of information about an industry before its delisting.

This result could arise from two effects. First, when a publicly listed target is acquired, it delists and no longer discloses standalone financial information. The loss of the target’s disclosures could directly reduce analysts’ information about the industry in general or limit their ability to interpret and process the disclosures made by an industry peer (which we term the “delisting effect”). Second, changes to industry competition from the merger may alter the variability of peer firms’ performance, impeding analysts’ ability to forecast earnings for industry peer firms (which we term the “merger effect”).

We perform a number of tests to assess which of these two effects likely cause the overall decline in the quality of analysts’ information about industry peer firms. The results of these tests strongly suggest that the delisting effect is the main driver of our results. First, we find that there is no decline in the quality of analysts’ information about industry peer firms following failed merger announcements – where a merger is announced but not completed. This suggests that it is the occurrence of an M&A delisting, i.e., when the target firm actually ceases to provide public financial disclosures, that drives our results and not analysts’ anticipation of changes to industry competition that might result from the merger.

Second, we examine changes in individual analysts’ earnings forecasts for industry peers. Among the analysts forecasting earnings for an industry peer, we compare the changes in analysts’ forecasting errors by the subset of analysts who also followed the target firm, i.e., “target-followers,” with the changes in those errors by analysts who follow the peer firm but who did not also follow the delisting target in the pre-M&A period, i.e., “non-target followers.” We find that, among analysts forecasting earnings for industry peers, only the target-followers’ forecasting errors increase, indicating that only target-followers experienced a deterioration in the quality of their information. Since analysts exploit information shared among firms they follow, this provides direct evidence that, among financial analysts forecasting earnings for peer firms, losing target firms’ disclosures disproportionately harms analysts who also followed the delisting target firm. This strongly suggests that the delisting effect (the loss of delisting firms’ public disclosures) is a key driver of the overall negative information externalities resulting from M&A delistings.

Our study has a number of policy implications. First, it shows that M&A has an unintended negative consequence for capital markets – an issue that has been overlooked in prior research. Specifically, we provide evidence that M&A delistings are associated with negative information externalities for listed industry peer firms. While prior studies examine competitive spillover effects from M&A, this is the first study to document negative information spillovers.

Second, our results suggest that the sharp decline in the number of publicly listed U.S. firms  caused by M&A delistings has reduced the efficiency of how information is used by capital market participants.

Third, our results contribute new insights regarding how positive information externalities emerge and propagate within U.S. capital markets; specifically, our results point to the importance of cross-firm information complementarities between firms (i.e., where the public disclosures of one firm provide information that analysts or investors use to better interpret and process the public disclosures issued by another firm in the same industry). Overall, the article highlights an underappreciated cost of the declining number of publicly listed firms in the U.S. capital markets.

This post comes to us from Anna Bergman Brown at Clarkson University, Donal Byard at Baruch College – City University of New York (CUNY),  Masako N. Darrough  at Baruch College – CUNY, and Jangwon Suh at Queens College – CUNY. It is based on their article, “The Impact of M&A Delistings on the Information Environment for Industry Peer Firms,” forthcoming in The Accounting Review and available here.