International Diversification and Forecast Optimism: The Effects of Reg FD

Abstract

Research shows that analysts following companies with a higher portion of foreign operations provide more optimistic forecasts, presumably in order to maintain favorable relations with management and thereby obtain improved access to information. We examine the effect of the introduction of Regulation Fair Disclosure (Reg FD) on analyst forecast bias for internationally diversified firms. We hypothesize that analysts' incentives to issue optimistic forecasts for such firms should be reduced in the post-Reg FD era, because Reg FD prohibits firms from selectively disclosing management information to analysts. First, we demonstrate that average forecast bias decreases for our full sample of multinational firms. Second, we show that the positive relation between forecast optimism and international diversification significantly declines (and even disappears) in the post-Reg FD period. Reg FD appears to have been successful in reducing analysts' optimistic bias and in reducing the effect of forecasting complexity on forecast bias for our sample of multinational firms.

Keywords: Analysts, forecast bias, Reg FD, international diversification

JEL Classification: M41, F20, G29, G38, F23