This study finds that pro-forma earnings forecasts by bidding firms during acquisitions are associated with a higher likelihood of deal completion, expedited deal closing, and with a lower acquisition premium − but only in stock-financed acquisitions. Analysts also respond to these forecasts by revising their forecasts for the bidder upward. However, the benefits of forecast disclosure only accrue to bidders with a strong forecasting reputation prior to the acquisition. Explaining why not all bidders forecast, we document a higher likelihood of post-merger litigation and CEO turnover for bidders with a weak forecasting reputation and for those that underperform post-merger.

This paper investigates whether and how financial restatements affect the market for corporate control. We show that firms that recently filed financial restatements are significantly less likely to become takeover targets than a propensity score matched sample of non-restating firms. For those restating firms that do receive takeover bids, the bids are more likely to be withdrawn or take longer to complete than those made to non-restating firms. Finally, there is some evidence that deal value multiples are significantly lower for restating targets than for non-restating targets. Our analyses suggest that the information risk associated with restating firms is the main driver of these results. Overall, this study finds that financial restatements have profound consequences for the allocation of economic resources in the market for corporate control. JEL Classifications: D82; G14; G34; M41. Data Availability: Data are available from sources identified in the paper.

We discuss “Economic Consequences of Mandatory Auditor Reporting to Bank Regulators” by Balakrishnan, De George, Ertan, and Scobie (BDES, in this issue). BDES concludes that a key benefit of mandatory auditor reporting to bank regulators is reduced bank risk, and its costs include reduced profitability from less overall and less risky lending, and higher audit costs. BDES also provides evidence on the channels through which mandatory auditor reporting links to reduced bank risk. We scrutinize BDES's analyses and inferences and suggest additional analyses to improve and deepen them. Most notably, we caution that effective bank regulation entails reducing risk for riskier banks; risk reduction for safer banks suggests regulatory overreach. Our evidence is more indicative of regulatory overreach. Thus, although BDES is an important step forward in understanding the role auditors can and do play in improving information available to key decision-makers other than through auditor reports on financial statements and internal controls, a comprehensive assessment of whether the benefits of mandatory auditor reporting to bank regulators exceed its costs is left for future research. Such an assessment is necessary before concluding whether mandatory auditor reporting leads to more effective bank regulation or regulatory overreach.

Our analysis of how banks’ responses to asset price changes can result in procyclical leverage reveals that, for banks with a binding regulatory leverage constraint, absent differences in regulatory risk weights across assets, procyclical leverage does not occur. For banks without a binding constraint, fair value and bank regulation both can contribute to procyclical leverage. Empirical findings based on a large sample of U.S. commercial banks reveal that bank regulation explains procyclical leverage for banks relatively close to the regulatory leverage constraint and contributes to procyclical leverage for those that are not. We also show that fair value accounting does not contribute to procyclical leverage.