We examine the credibility and consequences of synergy disclosures in over 12,000 U.S. merger and acquisition (M&A) transactions announced between 2004 and 2021. Using press releases and conference call transcripts, we identify both qualitative and quantitative statements about expected synergies. We find that these disclosures are more common in larger deals, when more stock-financing is used, and when the targets are publicly listed. Analyst coverage, institutional ownership, and acquirers' forecasting experience also help explain variation in disclosure practices. Disclosing firms earn higher announcement returns, particularly when disclosures are more detailed or include numeric estimates. However, these synergy expectations are often not fully realized. More intensive disclosures are associated with lower post-merger operating performance, and numeric estimates predict more frequent and larger goodwill impairments. Our findings suggest that while synergy disclosures are positively received by investors, they tend to be overoptimistic, raising concerns about the credibility of forward-looking statements in the M&A setting.

Separating operating from financial effects helps capture firm fundamentals, as these two types of risk tend to offset each other in the cross-section. We revisit the Fama-French six-factor model (FF6; 2018) by recomputing factors using operating characteristics while separately accounting for financial leverage. Our six-factor model subsumes the original FF6 model and outperforms the q-factor model (HXZ; 2015) in explaining a large set of documented anomalies. The improvement in capturing operating risk primarily stems from using return on net operating assets and growth in net operating assets as measures of profitability and investment, respectively. The enterprise book-to-market ratio becomes redundant once we consider the other operating characteristics. Additionally, after we control for operating effects, leverage is positively associated with returns, as predicted by theory, suggesting a renewed role for a leverage factor in asset pricing.