The effect of the SEC's regulation fair disclosure on analyst forecast attributes
| Date | 01 April 2006 |
| Pages | 192-209 |
| Published date | 01 April 2006 |
| DOI | https://doi.org/10.1108/13581980610659503 |
| Author | Rong Yang,Yaw M. Mensah |
| Subject Matter | Accounting & finance |
FEATURE ARTICLE
The effect of the SEC’s regulation
fair disclosure on analyst
forecast attributes
Rong Yang
Department of Business Administration, SUNY-College
at Brockport, Brockport, New York, USA, and
Yaw M. Mensah
Rutgers Business School, Rutgers University, Piscataway, New Jersey, USA
Abstract
Purpose – This study aims to examine the effect of the Securities and Exchange Commission’s
regulation fair disclosure (Reg. FD) on analyst forecast performance for pre-Reg. FD closed-call (CLC)
and open-call (OPC) firms compared with the non-conference-call (NCC) firms in the post-Reg. FD
period.
Design/methodology/approach – Specifically, it examines whether Reg. FD influenced the
earnings forecast accuracy and forecast dispersion of financial analysts for the previous-CLC firms in
the post-Reg. FD period compared with the previous-OPC firms, and both sets of conference call firms
relative to the NCC firms in the same period.
Findings – The main findings indicate that forecast accuracy improved for both OPC and CLC firms
compared with the NCC firms in the post-Reg. FD period. More importantly, the differences in earnings
forecast performance between the pre-Reg. FD OPC and CLC firms had disappeared in the post-Reg.
FD period.
Originality/value – These results offer further confirmation of previous findings that Reg. FD has
contributed to leveling the playing field for financial analysts and investors.
Keywords Financial institutions, Earnings, Forecasting, Disclosure,Conferencing
Paper type Viewpoint
1. Introduction
On October 23, 2000, the US Securities and Exchange Commission (SEC) issued
regulation fair disclosure (hereafter Reg. FD) which prohibits selective disclosur e of
material nonpublic information to certain financial analysts, institutional investors
and others prior to making it available to the general public. Information is
considered material if it is important enough to persuade an investor to buy or sell a
stock. Before the implementation of Reg. FD, most conference calls were accessible
only to certain analysts and institutional investors. It has been argued that conference
calls, because they were predominantly closed, may have contributed to an
information gap between analysts privy to the call and analysts and other investors
excluded from the call. The intent of Reg. FD was to prevent this selective disclosure
of information.
A number of published studies have already examined the impact of Reg. FD on
various aspects of the capital markets and investment climate, including the effect on
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Journal of Financial Regulation and
Compliance
Vol. 14 No. 2, 2006
pp. 192-209
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980610659503
analyst forecast accuracy and dispersion, although the findings have been
contradictory. Using data from the first three quarters after the release of Reg. FD,
Agarwal and Chadha (2003) report that sell-side analysts’ forecasts were less accurate
and more dispersed than before its adoption, where Heflin et al. (2003) report no change
in analysts’ earnings forecast bias, accuracy or dispersion compared to the pre-Reg. FD
period. Furthermore, Shane et al. (2001), also using data from the same period, find that
analysts gathered more information between earnings announcements so that their
forecasts are ultimately as accurate as those made in the period before Reg. FD was
adopted.
This study has two main objectives. The first is to examine if there were changes in
analyst earnings forecast errors (FE) and forecast dispersion (FD) in the pre- and
post-Reg. FD period between the “closed-call” (henceforth referred to as CLC) firms and
“open-call” (OPC) firms. The second objective is to determine if there were any changes
in analyst earnings forecast attributes between the CLC and OPC firms as a group
(labeled CC – conference call firms), and the non-conference-call (NCC) firms in the
post-Reg. FD environment.
Thus, this study contributes to the existing literature by differentiating between
firms in the pre-Reg. FD period that held closed conference calls, firms that held open
conference calls, and other firms which held NCCs. By limiting the study only to OPC
and NCC firms in the post-Reg. FD period, we are able to control for extraneous factors
such as changing group membership in our analyses. Second, because the study covers
the period from October 1998 to September 2002, more quarterly observations are
available to conduct the tests than in previous research.
The remainder of this study is organized as follows. Section 2 presents a brief
summary of previous studies focused on only the main sources, and an outline of the
hypotheses examined in the paper. Section 3 describes the sample selection and a brief
outline of our research methodology. Section 4 presents the major results of the study.
Section 5 presents the conclusions and suggestions for future research. In the
Appendix, we provide details on the research methodology and the regression
equations used to analyze the data.
2. Literature review and hypothesis development
2.1 Brief review
Economic theory suggests that expanded disclosures can reduce information
asymmetry arising between the firm and its shareholders or among potential buyers
and sellers of firm shares and benefit firms by correcting any firm mis-valuation and
increasing institutional interest and liquidity for the firm’s stock. For example, Diamond
and Verrecchia (1991) find that credible commitments by managers to improve
disclosure increasing the precision of public information about firm value results in
higher current stock prices due to reduced information asymmetry and increased
liquidity. Frankel et al. (1999) provide evidence that firms holding conference calls as a
voluntary disclosure medium tend to be relatively larger, more profitable, more heav ily
followed by analysts, and access the capital markets more often than other firms.
In other related findings, Bowen et al. (2002) provide evidence that regular use of
earnings-related conference calls could present a selective disclosure problem if the
public is not privy to these calls, even if conference calls tend to reduce both FE and FD.
Bushee and Noe (2000) find that firms with greater analyst following and greater
The effect of the
SEC’s Reg. FD
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