Regulation FD and the Financial Information Environment: Early Evidence

Abstract

On October 23, 2000, the SEC implemented Regulation FD (Fair Disclosure), which prohibits firms from privately disclosing value-relevant information to select securities markets professionals without simultaneously disclosing the same information to the public. We examine whether Regulation FD's prohibition of selective disclosure impairs the flow of financial information to the capital markets prior to earnings announcements. After implementation of FD, we find (1) improved informational efficiency of stock prices prior to earnings announcements, as evidenced by smaller deviations between pre-and post-announcement stock prices; (2) no reliable evidence of change in analysts' earnings forecast errors or dispersion; and (3) a substantial increase in the volume of firms' voluntary, forward-looking, earnings-related disclosures. Overall, we find no evidence Regulation FD impaired the information available to investors prior to earnings announcements, and some of our evidence is consistent with improvement.

Earnings Guidance and Managerial Myopia

“…Regulation Fair Disclosure (FD), which became effective October 2000, changed the nature of corporate earnings guidance by prohibiting managers from privately communicating with select market participants (e.g., Heflin et al [2003]). Accordingly our sample starts from 2001 to ensure that our results are not contaminated by private earnings guidance issued during the pre-FD period, which cannot be identified through public sources such as the CIG (Company Issued Guidelines) database from First Call, our source of earnings guidance data.…”

The Effects of Institutional Investor Objectives on Firm Valuation and Governance

“…As a result, this regulation effectively serves as an exogenous shock to the information advantage previously enjoyed by some well-connected institutions, improving market efficiency (Heflin, Subramanyam, Zhang, 2003), reducing flow of private information to analysts (Francis, Nanda, and Wang, 2006) and reducing informed trading in firms with blockholders and analyst access (Anderson, Reeb, Zhang, and Zhao, 2013). We take advantage of this exogenous shock to examine the importance of dedicated and transient ownership for firm overvaluation and misvaluation.…”

Optimism bias in financial analysts' earnings forecasts: Do commissions sharing agreements reduce conflicts of interest?

“…Analysts are more prone to issuing optimistic forecasts about firms with negative earnings. Following Duru and Reeb (2002), Heflin et al (2003), Herrmann et al (2008), Coen et al (2009) and Hovakimian and Saenyasiri (2010), we construct two dummy variables. EP SN EGAT IV Ei, t equals 1 if the actual earnings of firm i at t are negative and 0 otherwise.…”

“…The 12 large investment banks involved in this agreement are compelled to clearly separate their financial research and investment banking activities. A great deal of empirical literature shows that the GS was effective in reducing analysts' optimistic bias (Heflin et al, 2003, Mohanram and Sunder, 2006, Kadan et al, 2009, Clarke et al, 2011, Guan et al, 2012, Hovakimian and Saenyasiri, 2010, 2014.…”