Management Forecasts and Information Asymmetry: An Examination of Bid-Ask Spreads

This paper investigates whether the decision to issue a management earnings forecast is related to information asymmetry in the market for the firm s stock and whether the forecasts reduce the asymmetry. Theoretical models hold that a portion of the bid-ask spread arises because of asymmetric information and that specialists widen spreads when they perceive greater information asymmetry. We find that forecasting firms have wider bid-ask spreads than a matched sample of non-forecasting firms prior to the forecast release. This difference disappears after the release of the management forecast. Forecasting firms also experience a gradual increase in spreads over the twelve months leading up to the forecast. The spread is reduced to below the pre- forecast level after the forecast is released.