The Effect of Regulation FD on Transient Institutional Investors' Trading Behavior

We assess the impact of Regulation Fair Disclosure (Reg FD) on the trading behavior of transient institutional investors in the quarter prior to a bad news break in a string of consecutive earnings increases. Bad news breaks are defined as breaks that are by growth firms, preceded by longer strings of consecutive earnings increases, followed by longer strings of consecutive earnings decreases, and associated with larger declines in earnings. Pre–Reg FD transient institutions have abnormal selling of stocks in the quarter immediately preceding a bad news break. This abnormal selling is confined to firms that hold conference calls in the pre–Reg FD period. However, in the post–Reg FD period transient institutions do not exhibit similar abnormal selling of stocks in the quarter before a bad news break. Furthermore, after Reg FD transient institutions allocate less of their stock portfolios to conference call firms relative to non–conference call firms in the quarters prior to a bad news break. These results demonstrate that Reg FD has had an impact on management's selective disclosure behavior and significantly changed the trading behavior of transient institutions.     

The changing relationship between earnings expectations and earnings for value and growth stocks during Reg FD

Regulation Fair Disclosure (Reg FD) altered the voluntary disclosure practices of firms with publicly traded securities, thereby affecting relationships between value and growth stock expectations and actual earnings. The results show that earnings forecasts for both stock groups are biased but that bias is less after the introduction of Reg FD. In fact, the difference in pre/post FD forecast bias is larger for growth stocks, suggesting that before Reg FD, analysts did not just misinterpret news but consciously tried to maintain relationships with growth firm managers. However, Reg FD limited these relationships severing the monetary advantage that might be gained from manipulating forecasts.     

The impact of litigation risk on the strategic timing of management earnings forecasts

This paper examines whether managers strategically time their earnings forecasts (MEFs) as litigation risk increases. We find as litigation risk increases, the propensity to release a delayed forecast until after the market is closed (AMC) or a Friday decreases but not proportionally more for bad news than for good news. How costly this behaviour is to investors is questionable as share price returns do not reveal any under‐reaction to strategically timed bad news MEF released AMC. We also find evidence consistent with managers timing their MEFs during a natural no‐trading period to better disseminate information.     

The Effect of Managerial Litigation Risk on Earnings Warnings: Evidence from a Natural Experiment

We examine the causal effect of managerial litigation risk on managers’ disclosure of earnings warnings in the face of large earnings shortfalls. Exploring the staggered adoption of universal demand (UD) laws as an exogenous decrease in litigation risk, we find that the adoption leads to a decrease in managers’ issuance of earnings warnings, especially among firms facing a higher litigation risk prior to the adoption. In contrast, we find no change in managers’ tendency to alert investors of impending large positive earnings surprises. Collectively, our results provide causal evidence that higher litigation risk incentivizes managers to issue more earnings warnings. Our results differ from Bourveau et al.’s finding of an increase in the frequency of management earnings forecasts after the adoption of UD laws. We reconcile our findings with theirs by demonstrating that the effect of adopting UD laws on management earnings forecasts depends critically on forecast horizon: The adoption increases long-horizon forecasts, but decreases short-horizon forecasts.     

Does Regulation Fair Disclosure affect analysts’ forecast performance? The case of restructuring firms

The main purpose of this paper is to investigate how the enactment of Regulation Fair Disclosure (Reg. FD) influences analysts?? forecast characteristics for restructuring firms. The Reg. FD requires all firms disseminate material information not only to some institutional investors and certain financial analysts, but to all market participants simultaneously. We expect that the regulatory effect of Reg. FD on financial analysts?? forecast performance would be pronounced because of uncertain earnings signals and information complexity produced by restructuring activities. Particularly, we examine how the enactment of Reg. FD affects the relationship between analysts?? earnings forecast attributes and the occurrence and magnitude of restructuring charges. Our general finding is that analysts?? forecast errors and forecast dispersion have declined in the post-FD period for restructuring firms. However, such an impact cannot be persistent with an increase in the relative magnitude of restructuring charges, the proxy for restructuring complexity. This study provides additional evidence that Reg. FD has limited private information, and attempts to provide all users with the same access to information within the context of firms reporting restructuring charges.     

Changes in analyst following for less covered firms accompanying Regulation Fair Disclosure: the roles of ability and industry experience

We examine how Regulation Fair Disclosure (Reg FD) affects the decisions of analysts with various levels of ability and industry experience to add or drop less covered firms (LCFs), which are followed by only a few analysts. We use the analysts who continue to follow the same LCFs after Reg FD was implemented as a comparison group to explore the differences in the forecast properties of analysts who add LCFs and those who drop LCFs. We find that, after the implementation of Reg FD, analysts with greater ability or more industry experience are more likely to follow an LCF, and analysts with less ability are more likely to drop coverage of an LCF. In addition, we propose that analysts who add LCFs provide more accurate forecasts and are more likely to issue long-term forecasts. Moreover, compared with analysts who continue to cover the same LCFs, the analysts who drop coverage of LCFs issue more optimistic forecasts for LCFs in the pre-Reg FD period.     

SEC Regulation Fair Disclosure,information, and the cost of capital

Regulation Fair Disclosure (“Reg FD”), adopted by the U.S. Securities and Exchange Commission in October 2000 was intended to stop the practice of “selective disclosure”, in which companies give material information only to a few analysts and institutional investors prior to disclosing it publicly. Our analysis shows that the adoption of Reg FD caused a significant shift in analyst attention, resulting in a welfare loss for small firms, which now face a higher cost of capital. The loss of the “selective disclosure” channel for information flows could not be compensated for via other information transmission channels. This effect was more pronounced for firms communicating complex information and, consistent with the investor recognition hypothesis, for those losing analyst coverage. Moreover, we find no significant relationship of the different responses with litigation risks and agency costs. Our cross-sectional results suggest that Reg FD had unintended consequences and that “information” in financial markets may be more complicated than current finance theory admits.     

Consistency in meeting or beating earnings expectations and management earnings forecasts

This paper provides evidence that firms that have consistently met or beaten analysts’ earnings expectations (MBE) provide more frequent “bad news” management forecasts than firms with no established string of MBE, particularly when existing analyst forecasts are optimistic. This suggests that firms with a consistent MBE record are more likely to guide analysts’ expectations downward to avoid breaking the consistency. Subsequent analyst forecast revisions following bad news management forecasts issued by these firms are dampened, implying that analysts suspect that these forecasts may be opportunistic. The relation between management forecasts and MBE consistency is stronger after Regulation FD.     

Do Managers Withhold Bad News?

In this study, we examine whether managers delay disclosure of bad news relative to good news. If managers accumulate and withhold bad news up to a certain threshold, but leak and immediately reveal good news to investors, then we expect the magnitude of the negative stock price reaction to bad news disclosures to be greater than the magnitude of the positive stock price reaction to good news disclosures. We present evidence consistent with this prediction. Our analysis suggests that management, on average , delays the release of bad news to investors.     

Regulation FD and analysts’ vs. investors’ weightings of the cash components of earnings

This paper investigates whether investors’ bias in processing the information contained in the cash components of annual earnings has been reduced, and whether the difference in bias between financial analysts and investors has decreased subsequent to Regulation Fair Disclosure (hereafter, Reg FD). We compare analysts’ and investors’ weightings of the three cash flow components of earnings, defined by Dechow, Richardson, and Sloan (2008), from 1985 to 2008, using historical weightings as benchmarks. Our results show that, in the post Reg FD period, the magnitude of investors’ (analysts’) mis-weightings has decreased (increased), and the differences between analysts’ and investors’ mis-weightings have become smaller. Overall, these results suggest that financial analysts’ information advantages over investors declined after Reg FD took effect, and that investors consequently are less biased in assessing the persistence of the cash flow components of earnings following the implementation of Reg FD.     

Range has it: decoding the information content of forecast ranges

Range forecasts have emerged as the predominant form of management forecasts, but prior research has overlooked the information conveyed by forecast ranges. This study fills this void by examining the information content of the extent to which managers’ forecast ranges overlap with the range of individual analysts’ pre-existing estimates (i.e., overlap). We expect managers to signal their superior private information by issuing low-overlap forecasts. We predict and find that, compared with high-overlap forecasts, low-overlap forecasts are associated with stronger market reactions and higher accuracy of management forecasts relative to analyst estimates. Moreover, when responding to low-overlap management forecasts, analysts with prior estimates out of management forecast ranges are more likely to revise into the management forecast range, less likely to revise toward the consensus, and more likely to improve in revised forecast accuracy. Our findings suggest that investors and analysts view low-overlap management forecasts as signals of superior private information.     

The value relevance of timely information: The case of comparable store sales growth

Investors and analysts have called for more timely disclosure of corporate information. Responding to these demands, some retail firms issue comparable store sales (CSS) on a monthly or a quarterly basis in addition to an annual basis. This study examines whether a timely disclosure of CSS provides value-relevant information to market participants by examining investors' and financial analysts' responses at the time of CSS disclosures (short-horizon) and over the month or the quarter (long-horizon). We find that both monthly and quarterly CSS are associated with contemporaneous market returns and analyst forecast revisions. More importantly, we find that quarterly CSS news becomes less important to investors when firms provide more timely CSS information, indicating that monthly CSS reports may preempt the information content of quarterly CSS. Additional tests show that investors and analysts rely less on CSS if CSS news and earnings (sales) news are inconsistent.     

Detailed management earnings forecasts: do analysts listen?

We provide archival evidence on how a particular type of supplementary information affects the credibility of management earnings forecasts. Managers often provide detailed forecasts of specific income statement line items to shed light on how they plan to achieve their bottom-line earnings targets. We assess the effect of this forecast disaggregation on the credibility of management earnings forecasts. Based on a relatively large hand-collected sample of 900 management earnings forecasts, we find that disaggregation increases analysts’ sensitivity to the news in managers’ earnings guidance, suggesting that analysts find the guidance more credible. More importantly, we identify several factors that influence this relation. First, disaggregation plays a more important role when earnings are otherwise more difficult to forecast. Second, disaggregation is more important after Regulation Fair Disclosure prohibited selective disclosure, especially for firms that were more affected because they had previously provided more private guidance. Finally, in contrast to common assertions in the prior literature, we find that, in more recent years, disaggregation matters more for guidance that conveys bad news. Managers as well as researchers should be interested in evidence suggesting that financial analysts find disaggregation especially helpful in contexts where managers’ credibility is particularly important.     

Analyst rounding of EPS forecasts and stock recommendations

We examine the association between analysts' stock recommendations and their tendency to round annual EPS forecasts to nickel intervals (i.e. placing a zero or five in the penny location of the forecast). We find that prior to Regulation Fair Disclosure (Reg FD), analysts were more likely to provide rounded EPS forecasts in association with unfavorable (underperform and sell) recommendations. However, after Reg FD, we find no significant association between rounded forecasts and unfavorable stock recommendations. Further, other regulations (NASD 2711, NYSE 472, and Global Research Analyst Settlement) have no impact on analyst rounding behavior. The findings in this study suggest that analyst rounding behavior is a particular form of forecasting optimism motivated, at least in part, by management relations incentives. Further, Reg FD appears partially successful at curbing the influence of management relations incentives on analysts' research.     

The effect of Regulation FD on the properties of management earnings forecasts

We investigate Regulation FD’s (FD) effect on management earnings forecast properties. We posit FD’s prohibition on private manager-analyst communication reduces (increases) optimism (pessimism) in management earnings forecasts. Prior to FD, managers could avoid publicly retracting prior optimistic forecasts by privately communicating with analysts, who could lower investor expectations with a new analyst forecast. After FD, managers with optimistic forecasts must either publicly admit their optimism by issuing a new management forecast or they must negatively surprise investors at the earnings announcement. Further, FD forces managers to use public forecasts instead of private communications to establish beatable expectations. Our evidence suggests FD reduced optimism in management forecasts. This reduction in optimistic bias is not offset by an increase in pessimistic bias. Consistent with this, we further find post-FD improvements in forecast accuracy and informativeness. We find no such changes around several potentially confounding events or for foreign firms surrounding FD. Overall, our evidence suggests FD improved firms’ forecast properties (less bias, greater accuracy, and greater informativeness).     

Does Silence Speak? An Empirical Analysis of Disclosure Choices During Conference Calls

In this paper, we exploit the open nature of conference calls to explore whether managers withhold information from the investing public. Our evidence suggests that managers regularly leave participants on the conference call in the dark by not answering their questions. We find that the best predictors of such an event are firm size, a CEO's stock price–based incentives, company age, firm performance, litigation risk, and whether analysts are actively involved during the call's Q&A section. Finally, we document strong support for the assumption maintained in the literature that investors interpret silence negatively. That is, investors seem to interpret no news as bad news.     

Insider Trading and Voluntary Disclosures

We hypothesize that insiders strategically choose disclosure policies and the timing of their equity trades to maximize trading profits, subject to the litigation costs associated with disclosure and insider trading. Accounting for endogeneity between disclosures and trading, we find that when managers plan to purchase shares, they increase the number of bad news forecasts to reduce the purchase price. In addition, this relation is stronger for trades initiated by chief executive officers than for those initiated by other executives. Confirming this strategic behavior, we find that managers successfully time their trades around bad news forecasts, buying fewer shares beforehand and more afterwards. We do not find that managers adjust their forecasting activity when they are selling shares, consistent with higher litigation concerns associated with insider sales. Overall, our evidence suggests that insiders do exploit voluntary disclosure opportunities for personal gain, but only selectively, when litigation risk is sufficiently low.     

Information, Selective Disclosure, and Analyst Behavior

This paper examines whether the prohibition of selective disclosures to equity research analysts mandated by Regulation FD alters the amount of information and the manner in which it is revealed to the market. We demonstrate that equity research analysts are more responsive to information contained in company-initiated disclosures after Reg FD, suggesting that regulation has affected the importance of various channels of communication. We also present evidence consistent with the notion that managers use earnings guidance as a substitute for selective disclosure following the passage of Reg FD.     

Operating cash flow asymmetric timeliness in Australia

Operating cash flow (CFO) asymmetric timeliness occurs when CFO reflects bad news more quickly than good news. We examine the presence and determinants of CFO asymmetric timeliness in Australia, where substantial differences in reporting requirements of cash flow components, in characteristics of listed companies and in the degree of conservative financial reporting produce contrasting findings to those in the United States. We find supportive evidence for the novel ‘sticky cost behaviour’ explanation and also the product-pricing strategy, but not the life cycle hypothesis. These findings are useful for investors and analysts concerned with forecasting the future values of companies.     

Conflicts of interest in sell-side research and the moderating role of institutional investors

Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensive sample of analyst recommendations over the 1994–2000 period, we find that analysts’ recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.