Anti-Selective Disclosure Regulation and Analyst Forecast Accuracy and Usefulness

Abstract

We investigate regulations intended to stop managers from privately disclosing corporate information to analysts in a setting with enhanced potential to isolate regulatory effects: the European Union (EU) Market Abuse Directive (MAD), a common regulation implemented by member states with varying sanctions and enforcement resources. Following the implementation of MAD in a country, analyst forecasts become more accurate, with relatively little of the effect attributable to increased voluntary public disclosure by covered firms. The effect of MAD on analyst accuracy is stronger in countries with more stringent enforcement and sanction systems. Although the improvement in accuracy is associated with the implementation of MAD alone, stock prices do not respond more strongly to analyst forecast releases until after market-trading enforcement improves under subsequent EU legislation (MiFID).

Keywords: Market Abuse Directive, financial analysts, sell-side analysts, selective disclosure, IBES, earnings announcements, Markets in Financial Instruments Directive (MiFID), Regulation Fair Disclosure (Reg FD)

JEL Classification: G14, G17, G18, G24, G28, G38