Earnings and Price Discovery in the Post-Reg. Fd Information Environment: A Preliminary Analysis
27 Pages Posted: 21 Nov 2001
Date Written: November 15, 2001
On October 23, 2000, the SEC implemented a regulation that changed the way corporate managers interact with analysts and investors. Under Reg. FD, managers can no longer give individual guidance to analysts without simultaneously disclosing the information to the public. This paper examines the impact of this change in the information environment. We find that, although Reg. FD curtails private discussions between managers and analysts, the percentage of earnings announcements that meet or slightly beat analysts' expectations has not declined after Reg. FD. We also evaluate differences in the accuracy of analysts' quarterly earnings forecasts during the year before and the year after Reg. FD. We find that forecasts issued early in quarters after Reg. FD are less accurate than similarly timed forecasts prior to Reg. FD. However, our evidence suggests that in the post-Reg. FD period, analysts gather relatively more uncertainty-relieving information between earnings announcements and, by the end of the quarter, their forecasts are as accurate as they were in the prior year. Finally, our evidence suggests that, relative to the preceding year, price discovery has improved in the post-Reg. FD period. Controlling for the level of uncertainty at the beginning of the quarter, we find significantly reduced stock market reactions to earnings announcements after Reg. FD. Overall, these results suggest that, in the post-Reg. FD environment, firms have found effective alternative means of informing analysts and investors about forthcoming quarterly earnings.
Keywords: Reg. FD; Analysts forecasts; Regulation; Information environment
JEL Classification: G14, G18, G29, K22, L51, M41
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