Bremner Health Insurance Company (BHIC) is a publicly traded medical insurance company in the United States. At the time of establishment in 2019, the company decided to provide medical insurance to consumers without conducting a medical exam or asking for information about medical history. BHIC believed that everyone should have the right to medical insurance coverage, regardless of his or her medical health.

In its first two years of operation, the company generated earnings of $1.13 per share in 2019 and $1.25 per share in 2020 and was becoming very popular among consumers as the go-to place for medical insurance. Several financial analysts have been closely following the company and have forecast earnings of $1.45 per share for 2021, as they believe the company will present good news on its earnings announcement date. On February 9, 2022, its shares were trading on the market for $128.60 per share. The next day the company released its 2021 year-end earnings and announced earnings of $1.38 per share, well short of analysts’ expectations of $1.45 per share. The company disclosed in the notes that it had incurred large medical coverage expenses during 2021 primarily because of many of its customers suffering from terminal illnesses. After the earnings announcement, BHIC’s share price fell to $124.40 per share.

Required:

a. What type of information asymmetry is present in this case and how could BHIC decrease its effects?

b. Assuming a semi-strong form efficient market, why do you believe the share price fell on the day of the earnings announcement?

c. If BHIC had reported earnings of $1.46 per share as its earnings, what reaction would you expect from the market in the days following the announcement?

d. How important do you believe meeting forecast expectations is for publicly traded companies, and what kind of problems do you see arising as a result of attempting to meet these forecasts?