Anchoring Bias in Analysts’ EPS Forecasts: Evidence from Mergers and Acquisitions
Author
Abstract
This study investigates whether the acquiring firm’s earnings per share (EPS) forecasts released by analysts are biased toward the industry norm. The literature provides significant evidence for the irrational behavioral bias of anchoring and adjustment mechanisms across diverse domains. We predict the anchoring heuristic bias may affect analyst earnings forecast behavior. Moreover, this study considers types of M&A deals with different information characteristics that may drive the mitigation effect on analysts’ anchoring, such as non-cash-financed and inter-industry mergers. Our results show that analysts tend to put weight on the industry median forecasted EPS and that this anchoring heuristic behavior results in a notable level of forecasting bias in acquisition activities. This anchoring effect may be mitigated by non-cash-financed and inter-industry mergers. This study is the first one to clarify the influence of anchoring effect on analyst earnings forecasts for acquiring firms. Our empirical results would fill the gap of the related literature.
