Analyst Coverage and Acquisition Returns : Evidence from Natural Experiments

Takeover targets covered by more equity analysts receive higher premiums while their acquirers earn lower merger announcement returns. We confirm these results using exogenous shocks to coverage as instruments for coverage loss. The analyses also show that covered targets experience a permanent market value appreciation in deals that are subsequently withdrawn. These findings indicate that analyst coverage of takeover targets materially affects shareholder wealth for both targets and acquirers. Our evidence indicates that analyst coverage creates value for shareholders of takeover targets through either a monitoring channel or a visibility improvement channel, but not through a reduction in information asymmetry