Relationship Between Management Forecast Quality and Quality of Acquisition Decisions of Other Companies Considering Type of Acquisition Industry

Document Type : Research Paper

Authors

1 Ph.D. Candidate of of Accounting, Shahid Bahonar University, Kerman, Iran.

2 Professor of Accounting, Shahid Bahonar University, Kerman, Iran.

10.22103/jdc.2022.19364.1232

Abstract

Objective: Corporate investment decisions require managers to forecast expected future cash flows from potential investments. Although these forecasts are a critical component of successful investing, they are not directly observable by external stakeholders. Corporate acquisition, is one of  the capital budgeting decisions. Nowadays, with the advancement of technology and globalization of business The corporate business environment is a competitive environment. Therefore, commercial companies, with the incentive to increase market share and achieve market power, create profitability and economic value added for their shareholders, have been developing business through the merger and acquisition of shares of other companies. In this regard, making decisions about investing and estimating projects and choosing the best project is one of the main tasks of managers, which requires an understanding of the manager from the business and economic environment and the forecasts in each of the budgeting stages followed by, Choosing the best project. But forecasts and estimates of management for internal decisions are not visible to investors. Based on the view that managers have similar skills in reported earnings forecast and forecasting internal returns for investment decisions, it is predicted that managers with higher forecast quality will make better investment decisions. Therefore, the purpose of this research is Investigate the relationship between management forecast quality and quality of acquisition decisions of other companies considering type of acquisition industry.
Method: The present study is a post-event research and is applied in terms of purpose. Multivariate linear regression model and cross-sectional data were used to test the research hypotheses. The statistical population of the study is companies listed on the Tehran Stock Exchange. The research sample includes 67 observations. The present study examines the relationship between management forecast quality and the quality of investment decisions. By examining the relationship beween the quality of management forecast and the quality of decision making  on investment in other companies (corporate acquisition), which occurs afterwards,the post-acquisition performance measures (Healy et al., 1992), such as: post-acquisition changes in profitable and post-acquisition changes in operating cash flows have been used as proxy for the quality of acquisition decisions. Also, measurements of post-acquisition changes in returns on  sales, post-acquisition changes in return on assets, and post-acquisition changes in return on equity have been used as measures for post-acquisition changes in profitability. The average earnings forecasting accuracy during the three-year period before acquisition is used as a proxy for forecast of management.
Results: There is a positive and significant relationship between earnings forecasting accuracy with post-acquisition changes in profitability and post-acquisition changes in operating cash flows. In addition, the type of acquisition industry affects on the relationships between earnings forecast accuracy and post-acquisition changes in sales return, earnings forecast accuracy and post-acquisition changes in return on equity, and earnings forecast accuracy and post-acquisition changes in operating cash flows. But the type of acquisition industry does not affecta effect on the relationship between earnings forecast accuracy and post-acquisition changes in Return on assets.
Conclusion: The management Forecast quality is directly related to the quality of acquisition decisions. Results show that the manager who provides a higher quality forecast makes better decisions for acquisition. Therefore, it can be said that increasing the quality of management forecasting is beneficial in increasing the acquisition performance for acquiring companies. Therefore, management's foresight ability is very important in maximizing the synergistic benefits of the learning process and thus increasing operational performance after acquisition. In order to make optimal investment decisions, companies need managers who are accurate in predicting the expected cash flows of potential investments. Subsequently, invest in projects that have a positive net present value and create profitability for the company and lead to the maximization of shareholders' wealth. Therefore, it can be said that the quality of acquisition decisions also depends on the quality of management's forecast. Negotiations are not productive unless the acquiring company has a clear vision of the value of the target company. It is noteworthy that this process depends on managers' ability to predict and their understanding of the economic environment. Also, the quality of profit forecast can be used as a visible criterion by external stakeholders to infer the quality of capital budgeting decisions. In addition, investors can use the accuracy of profit forecast in evaluating management performance in connection with investment decisions and then proceed to make a decision.

Keywords

Main Subjects

References

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Journal of Development and Capital
Volume 8, Issue 1 - Serial Number 14
September 2023
Pages 85-107

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History

  • Receive Date: 07 May 2022
  • Revise Date: 04 July 2022
  • Accept Date: 14 August 2022

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