Bargaining Power and the Relations between Changes in Purchase Obligations and Future Earnings, Analysts’ Forecast Errors, and Stock Price Changes

Abstract

As a result of a 2003 SEC regulation intended to increase the transparency of firms’ off-balance sheet obligations, tabular data on purchase obligations became available in the MD&A section of firms’ 10-Ks. We develop a program to read the text of these disclosures and we create a database to facilitate our examination of the impact of bargaining power on the implications of changes in a firm’s purchase obligations for future earnings. We use a variable indicating whether the firm is stressed by current operating losses to proxy for weakness in the firm’s bargaining power with suppliers. We find that changes in purchase obligations are positively (negatively) related to the subsequent year earnings changes of firms with current operating profits (losses). We find that financial analysts do not fully impound information about buyer bargaining power when forecasting the future earnings implications of changes in purchase obligations. We do not find that this earnings forecasting inefficiency affects the efficiency of stock prices with respect to information about operating losses and changes in purchase obligations. However, we do find evidence suggesting that stock prices overestimate the future earnings implications of increases in profit firms’ purchase obligations.

Keywords: Bargaining Power, Purchase Obligations, Future Earnings, Analysts' Forecasts