The Effect of Regulation FD on Transient Institutional Investors' Trading Behavior |
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| Authors: | BIN KE KATHY R PETRONI† YONG YU‡ |
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| Institution: | Penn State University;;Michigan State University;;University of Texas at Austin. We acknowledge comments from Eric Hirst, Michael Ferguson, an anonymous reviewer, and workshop participants at the Chinese University of Hong Kong, University of Texas at Austin, Washington University in St. Louis, and Singapore Management University. We thank Brian Bushee for sharing his open conference call data. |
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| Abstract: | 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. |
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