Did Regulation Fair Disclosure, SOX, and Other Analyst Regulations Reduce Security Mispricing?

54 Pages Posted: 1 Jul 2012 Last revised: 25 Feb 2014

See all articles by Edward Lee

Edward Lee

University of Manchester - Alliance Manchester Business School

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Zhenmei (Judy) Zhu

Fudan University - School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: February 24, 2014

Abstract

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

Lee, Edward and Strong, Norman Charles and Zhu, Zhenmei, Did Regulation Fair Disclosure, SOX, and Other Analyst Regulations Reduce Security Mispricing? (February 24, 2014). Available at SSRN: https://ssrn.com/abstract=2097005 or http://dx.doi.org/10.2139/ssrn.2097005

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Norman Charles Strong

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Zhenmei Zhu (Contact Author)

Fudan University - School of Management ( email )

670 Handan Road
Shanghai
China

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