Earnings Surprises in Analysts' Forecasts, Mandatory Disclosure, and Share Repurchases

Abstract

This paper examines the impact of forecast errors and the mandatory disclosure of repurchase transactions required by 2003 Securities and Exchange Commission (SEC) regulations on share repurchases. We define forecast errors as the difference between analysts' forecasted earnings and actual earnings. We argue that firms with positive forecast errors imply greater information asymmetry, which may induce them to signal through share repurchases. We show that both the repurchase target and analysts' forecast revision are positively related to forecast errors. Furthermore, these associations are more pronounced in the low disclosure period (1989)(1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003) where greater information asymmetry between managers and outside investors is found, while increased transparency in the high disclosure period (2004)(2005)(2006) leads to more significant improvement in longterm performances for firms with positive forecast errors. The results are consistent with our expectations that the information asymmetry implied in forecast errors, along with a shock change from the introduction of the 2003 SEC regulation, affect both corporate and analysts' behaviour.

Choice between rights issue and private placements of equity and the role of information asymmetry

“…However, when the information is not enough to make accurate predictions, the reported numbers and the estimates tend to deviate from each other, thus resulting in a surprise element. This suggests that information asymmetry and forecast surprises share a positive relationship (Liu and Chen, 2015; Gomes and Philips, 2012; Li and Zhao, 2008).…”

Motivations and Determinants for Share Repurchases Activity according to the Opinion of Managers and Academics: the Case of Saudi Arabia Alghamdi

“…By examining the association between share repurchases and prior forecast errors, Liu and Chen (2015) observe that managers prefer share repurchases over other signalling devices when trying to relieve information asymmetry. Rau and Vermaelen (2002) found that debt financed share repurchases can lower corporate taxes and therefore lower the company's cost of capital.…”