Abstract The vast majority of managers’ earnings forecasts are issued concurrently (i.e., bundled) with their firm’s current earnings announcement. We document a predictable bias in these forecasts—the forecasts fail to fully reflect the persistence of the current earnings surprise. Specifically, we find that managers issue (1) optimistically biased forecasts alongside negative earnings surprises and (2) pessimistically biased forecasts alongside large positive earnings surprises. Bayesian updating implies this bias could be unintentional, but we find that the bias is stronger when managers have greater incentives and fewer constraints to issue biased forecasts, suggesting that, to some extent, the bias might be intentional. Relatedly, although managers typically have better information about their firm’s earnings than analysts, we show that analyst reliance on these biased management forecasts represents a mechanism (and an alternative interpretation) for a similar analyst underreaction to current earnings attributed in the literature to analysts’ cognitive bias. We also find that, on average, investors do not appear to initially understand the bias in these forecasts but do unravel it over longer windows. However, investors more quickly unravel the bias when the manager has a history of issuing biased forecasts and when the firm has more sophisticated investors. Overall, we document that managers’ forecasts appear to repeatedly underweight the persistence of current earnings surprises, are biased in ways that improve investors’ perceptions of managers’ ability, and that this behavior concentrates in subsamples where outsiders have a harder time recognizing any bias.

Abstract We examine the association between target firms' public non‐GAAP earnings disclosures and merger and acquisition (M&A) efficiency. This research question is important, given the widespread use of non‐GAAP metrics in M&A valuation and lack of evidence regarding the real effects of non‐GAAP disclosure. Public non‐GAAP disclosure can enhance bidders' ability to assess a target's core earnings and potential synergy, especially in the earlier stages of due diligence, and enable bidders to make better M&A decisions. We find that target firms' non‐GAAP disclosures are associated with greater M&A efficiency, greater synergies, and lower likelihood of post‐acquisition goodwill impairment. We also find some evidence that target firms' non‐GAAP disclosures are positively related to post‐acquisition operating performance. Further, we find modest evidence that the positive relation between non‐GAAP disclosures and M&A efficiency is stronger (1) for targets that are more difficult to value, (2) for targets with weaker information environments, and (3) when targets' non‐GAAP numbers are of higher quality. Overall, our evidence suggests that non‐GAAP disclosures help facilitate efficient resource allocation in M&As and are associated with real effects on corporate investment. Our evidence is potentially relevant to regulators' concerns about the usefulness of non‐GAAP metrics.