Regulation FD and the Financial Information Environment: Early Evidence

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.

[1]  Brian J. Bushee,et al.  Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility , 2000 .

[2]  Philip B. Shane,et al.  Earnings and Price Discovery in the Post-Reg. Fd Information Environment: A Preliminary Analysis , 2001 .

[3]  S. Kothari,et al.  An analysis of intertemporal and cross-sectional determinants of earnings response coefficients , 1989 .

[4]  Michael B. Clement.  Analyst Forecast Accuracy: Do Ability, Resources and Portfolio Complexity Matter? , 1999 .

[5]  Wayne R. Landsman,et al.  Has the Information Content of Quarterly Earnings Announcements Declined in the Past Three Decades , 2002 .

[6]  Robert E. Verrecchia,et al.  Disclosure, Liquidity, and the Cost of Capital , 1991 .

[7]  Carla K. Hayn.  The information content of losses , 1995 .

[8]  Theodore E. Christensen,et al.  Do We Really 'Know' What We Think We Know? A Case Study of Seminal Research and its Subsequent Overgeneralization , 2000 .

[9]  A. Lo,et al.  Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test , 1987 .

[10]  Richard A. Lambert,et al.  The information content of security prices , 1980 .

[11]  Margaret A. Neale,et al.  Expertise in forecasting performance of security analysts , 1999 .

[12]  Autocorrelation structure of forecast errors from time-series models: Alternative assessments of the causes of post-earnings announcement drift , 1999 .

[13]  Richard R. Mendenhall,et al.  Option listing and the stock-price response to earnings announcements 1 We appreciate the comments o , 1999 .

[14]  Mary E. Barth,et al.  Analyst Coverage and Intangible Assets , 2000 .

[15]  Russell J. Lundholm,et al.  CROSS- SECTIONAL DETERMINANTS OF ANALYST RATINGS OF CORPORATE DISCLOSURES , 1993 .

[16]  Krishna G. Palepu,et al.  Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure , 1999 .

[17]  E. B. Grant,et al.  Market Implications Of Differential Amounts Of Interim Information , 1980 .

[18]  R. Ball,et al.  How Naive Is the Stock Market's Use of Earnings Information? , 1996 .

[19]  S. Sunder,et al.  How Has Regulation Fair Disclosure Affected the Functioning ofFinancial Analysts , 2004 .

[20]  Bipin B. Ajinkya,et al.  Corporate Managers' Earnings Forecasts and Symmetrical Adjustments of Market Expectations , 1984 .

[21]  Rowland K. Atiase,et al.  Predisclosure Information, Firm Capitalization, And Security Price Behavior Around Earnings Announcements , 1985 .

[22]  R. Ball,et al.  An empirical evaluation of accounting income numbers , 1968 .

[23]  Debra C. Jeter,et al.  The effect of reporting restructuring charges on analysts’ forecast revisions and errors , 1999 .

[24]  W. Beaver.  The Information Content Of Annual Earnings Announcements , 1968 .

[25]  A. Christie,et al.  The stochastic behavior of common stock variances: value , 1982 .

[26]  L. Brown,et al.  Security Analyst Superiority Relative to Univariate Time-Series Models in Forecasting Quarterly Earnings , 1987 .

[27]  Joseph D. Piotroski,et al.  Forward-Looking Earnings Statements: Determinants and Market Response , 2000 .

[28]  Richard R. Mendenhall,et al.  Bad News and Differential Market Reactions to Announcements of Earlier-Quarters Versus Fourth-Quarter Earnings , 1988 .

[29]  Victor L. Bernard,et al.  POST-EARNINGS-ANNOUNCEMENT DRIFT - DELAYED PRICE RESPONSE OR RISK PREMIUM , 1989 .

[30]  Patricia M. Dechow,et al.  Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC* , 1996 .

[31]  Douglas J. Skinner.  Earnings Disclosures and Stockholder Lawsuits , 1995 .

[32]  Mark H. Lang,et al.  Voluntary Disclosure and Equity Offerings: Reducing Information Asymmetry or Hyping the Stock?* , 1997 .

[33]  Victor L. Bernard,et al.  CROSS-SECTIONAL DEPENDENCE AND PROBLEMS IN INFERENCE IN MARKET-BASED ACCOUNTING RESEARCH , 1987 .

[34]  Katherine Schipper,et al.  Expanded Disclosures and the Increased Usefulness of Earnings Announcements , 2002 .

[35]  V. Bernard,et al.  Evidence that stock prices do not fully reflect the implications of current earnings for future earnings , 1990 .

[36]  S. Penman.  The articulation of price-earnings ratios and market-to-book ratios and the evaluation of growth , 1996 .

[37]  R. Freeman,et al.  The association between accounting earnings and security returns for large and small firms , 1987 .

[38]  Robert E. Verrecchia,et al.  THE EFFECT OF SEQUENTIAL INFORMATION RELEASES ON THE VARIANCE OF PRICE CHANGES IN AN INTERTEMPORAL MULTI-ASSET MARKET , 1988 .

[39]  Katherine Schipper,et al.  Earnings Announcements and Competing Information , 2002 .

[40]  Dale L. Morse,et al.  Price And Trading Volume Reaction Surrounding Earnings Announcements - A Closer Examination , 1981 .

[41]  R. Parks,et al.  Efficient Estimation of a System of Regression Equations when Disturbances are Both Serially and Contemporaneously Correlated , 1967 .

[42]  Douglas A. Schroeder,et al.  Firm Prominence and the Differential Information Content of Quarterly Earnings Announcements , 1989 .

[43]  R. Freeman,et al.  The Multiperiod Information-Content Of Accounting Earnings - Confirmations And Contradictions Of Previous Earnings Reports , 1989 .

[44]  Jennifer Francis,et al.  Causes and effects of discretionary asset write-offs , 1996 .

[45]  Terence Lim,et al.  Rationality and Analysts' Forecast Bias , 2001 .

[46]  Theodore E. Christensen,et al.  Factors Associated with Differences in the Magnitude of Abnormal Returns Around NYSE Versus NASDAQ Firms' Earnings Announcements , 2001 .