Conference Calls for Merger Announcements

Research by Michael Kimbrough

Conference calls around merger announcements help companies gain credibility and favorably influence stock prices, but only if your CEO is well-spoken and well-prepared.

Investors react more favorably to conference calls because they allow managers to provide more information and directly address investor’s questions and concerns.

Many firms practice voluntary disclosure for routine accounting releases, such as management forecasts of earnings announcements. But companies also need to court investor buy-in when pursuing a strategic initiative like a merger, where the impact to the company is unlikely to be fully apparent for several years. So how can a firm manage the process of communicating about such an important corporate event in a way that will favorably influence investors? Michael D. Kimbrough, associate professor of accounting, found that conference calls around merger announcements help companies gain credibility and favorably influence stock prices.

Kimbrough and his co-author examined 1,228 merger bids on Security Data Company’s (SDC) online database of domestic mergers and acquisitions that were announced between January 1, 2002 and December 31, 2006, focusing on economically important mergers where the role for voluntary disclosure is particularly strong. Companies in the sample had an average market capitalization of over $2 billion. They found that bidders who hold conference calls at merger announcements experience announcement returns that are substantially higher than they would have otherwise experienced.

Conference calls were more likely to be used in especially large and complex mergers, where the intent of firm management is likely to be unclear to investors, and in stock-to-stock mergers, where there is a natural skepticism on the part of investors.

Investors react more favorably to conference calls because they allow managers to provide more information and directly address investor’s questions and concerns. The information expressed in conference calls also tended to be more forward-looking than that provided in company press releases.

“Much of the information you are going to provide are things that can’t be verified for some time, like the strategic rationale behind the merger, what the anticipated synergies might be,” says Kimbrough.

Conference calls have been in use since the mid 1990s and their use has steadily increased as the technology has improved. Disclosure is partially driven by investor demand but has proved to be a useful tool for companies, particularly those in high-tech industries or that have a business model that is hard to understand or operations that are particularly complex.

“Companies can build credibility by providing supporting detail for the high-level vision—this is why the companies are coming together, this is how we are going to achieve those benefits, these are the benchmarks we are going to use as we march toward that vision,” says Kimbrough.

Could a company get the same effect from providing more information in an expanded press release? Not really, says Kimbrough. Part of the effectiveness of a conference call comes from the opportunity to interact with analysts, answering questions as they arise and limiting potential misinterpretations by investors. For companies that genuinely have favorable private information to convey, a conference call is an effective vehicle for making its case to investors.

So why don’t all firms provide conference calls? There is an element of risk for companies—if managers are not able to quickly and confidently answer questions from analysts, or if they are not able to marshal sufficient evidence to make the company’s claims convincing, a conference call may prove more harmful than helpful. That is what happened when Pepsico acquired Quaker Oats. During their initial conference call, management wasn’t able to provide the information analysts asked for, leading the company to schedule a second conference call. But by then analysts had soured on the deal and the company suffered a drop in stock prices.

Kimbrough cautions that the way managers comport themselves can make or break the success of a conference call. “Managers' ability to convey assurance, competence and capability plays an essential role,” says Kimbrough. “Not only are there scripted remarks, but you have to make your case to analysts in an interactive setting. How you respond goes a long way toward establishing your credibility.”

“Voluntary disclosure to influence investor reactions to merger announcements: an examination of conference calls” was co-authored by Kimbrough and Henock Louis, Pennsylvania State University, is forthcoming from The Accounting Review. For more information, contact mkimbrough@rhsmith.umd.edu.