Reference no: EM133108191

Question - On October 7, 2000, financial media reported that Air Canada had slashed its third and fourth quarter 2000 earnings forecasts. The company had revealed this information by phone calls to a select group of analysts. Air Canada's share price dropped by 12 percent on the day it revealed this information to analysts, and by another 3 percent on the next trading day.

The selective disclosure to certain analysts immediately produced strong negative reactions by angry investors and the media, and led to calls for investigation by the Ontario Securities Commission and the Toronto Stock Exchange.

Air Canada defended its disclosure policy by claiming that the information underlying the lower earnings forecasts, of high fuel prices and higher pilot salaries, was already in the public domain. Despite this however, Air Canada agreed to pay a fine of $1,080,000 to settle charges over this incident.

1. Why would Air Canada want to disclose information about lower-than-expected earnings prior to the actual release of its quarterly income statement?

2. Use the efficient market hypothesis to explain why share price fell in the day following the selective disclosure?