Analysts' Forecasts: Low-Balling,Market Efficiency,and Insider Trading

The phenomenon of low-balling reported in the financial press involves downward biased projections of earnings by managers or analysts, thereby artificially lowering market expectations and creating a positive earnings surprise when actual earnings are announced. This study reports that the stock market does respond to such surprises relative to analysts' reported forecasts. Further, the proportion of insider buy-transactions in the period prior to the earnings forecast is significantly higher for the sample with high positive earnings surprise than for the control sample with zero forecast errors. The study cannot distinguish whether managers or analysts are the source of the low-balling and therefore makes no statement on the legality of such insider trades.