Did Regulation Fair Disclosure, SOX, and Other Analyst Regulations Reduce Security Mispricing?
54 Pages Posted: 1 Jul 2012 Last revised: 25 Feb 2014
Date Written: February 24, 2014
Between 2000 and 2003 a series of disclosure and analyst regulations curbing abusive financial reporting and analyst behavior were enacted to strengthen the information environment of U.S. capital markets. We investigate whether these regulations reduced security mispricing and increased stock market efficiency. After the regulations, we find a significant reduction in short-term stock price continuation following analyst forecast revisions and earnings announcements. The effect was more pronounced among higher information uncertainty firms, where we expect security valuation to be most sensitive to regulation. Analyst forecast accuracy also improved in these firms, consistent with reduced mispricing being due to an improved corporate information environment following the regulations. Our findings are robust to controls for time trends, trading activity, the financial crisis, analyst coverage, delistings, and changes in information uncertainty proxies. We find no concurrent effect among European firms and a regression discontinuity design supports our identification of a regulatory effect.
Keywords: Disclosure regulations, Analyst regulations, Information uncertainty, Stock returns
JEL Classification: G14, G18
Suggested Citation: Suggested Citation