Can Analysts Analyze Mergers?

Merger and Acquisitions (M&As) provide a plausibly exogenous shock to analysts’ decision to drop, add or maintain coverage of the merged firms. Higher caliber analysts covering the acquiring and target firms before the M&A deal are more likely to cover the merged firm. The majority of target analysts drop coverage of the merged firm following the delisting of the target stock. However, the target analysts who retain coverage provide more accurate earnings forecasts than the remaining acquirer analysts. A greater percentage of target analysts retaining coverage is associated with better long-run stock performance. We do not find this relation with acquirer analysts. Our evidence is consistent with the hypothesis that the remaining target analysts exert more effort than the acquirer analysts in understanding the M&A transaction, and their coverage decision reveals more information about the prospects of the merged firms.