Information Leakage Prior to Company Issued Guidance

We find that information leakages prior to public guidance issued by company management exist even after Regulation Fair Disclosure (FD), and are more pronounced when characteristics of the firm, the guidance, or the industry reflect higher levels of information asymmetry. Since public guidance is only partially leaked, this information leakage can be used to anticipate the information content of the impending public guidance. We simulate a trading strategy based on the preguidance leakage in the period after Regulation FD, which suggests that information leakage is an effective signal of the information content within impending public guidance.     

The Impact of Regulation Fair Disclosure on Information Asymmetry and Trading: An Intraday Analysis

This study examines the impact of Regulation Fair Disclosure (FD) on liquidity, information asymmetry, and institutional and retail investors trading behavior. Our main findings suggest three conclusions. First, Regulation FD has been effective in improving liquidity and in decreasing the level of information asymmetry. Second, retail trading activity increases dramatically after earnings announcements but there is a significant decline in institutional trading surrounding earnings announcements, particularly in the pre‐announcement period. Last, the decline in information asymmetry around earnings announcements is closely associated with a lower participation rate in the pre‐announcement period and more active trading of retail investors after earnings releases.     

An Examination of the Differential Impact of Regulation FD on Analysts' Forecast Accuracy

Regulation fair disclosure (FD) requires companies to publicly disseminate information, effectively preventing the selective pre‐earnings announcement guidance to analysts common in the past. We investigate the effects of Regulation FD's reducing information disparity across analysts on their forecast accuracy. Proxies for private information, including brokerage size and analyst company‐specific experience, lose their explanatory power for analysts' relative accuracy after Regulation FD. Analyst forecast accuracy declines overall, but analysts that are relatively less accurate (more accurate) before Regulation FD improve (deteriorate) after implementation. Our findings are consistent with selective guidance partially explaining variation in the forecasting accuracy of analysts before Regulation FD.     

Does Regulation Fair Disclosure Reduce the Information Quality of Managerial Guidance?

We examine an effect of Regulation Fair Disclosure (Reg FD) on voluntary public managerial guidance information quality. Results suggest that the information quality of public guidance has not deteriorated after Reg FD. We also examine separately the effect of Reg FD on information efficiency before earnings releases for firms that provide public managerial guidance and those that do not. We find that when we control for the impact of Reg FD on firm characteristics, information efficiency deteriorates for firms that do not provide public guidance and for new guiders, while it does not change for firms that continue issuing public guidance after Reg FD.     

Regulation Fair Disclosure and the Cost of Adverse Selection

Regulation Fair Disclosure (FD), imposed by the Securities and Exchange Commission in October 2000, was designed to prohibit disclosure of material private information to selected market participants. The informational advantage such select participants gain is unclear. If multiple “insiders” receive identical information, private information is immediately incorporated in price and each insider has zero expected profit. If, on the other hand, Regulation FD has curtailed the flow of information from firms, private information becomes longer‐lived and more valuable. Hence, market makers will demand increased compensation by widening the adverse selection component of the bid‐ask spread. We identify the cost components of the bid‐ask spread for a sample of NASDAQ stocks surrounding the implementation of Regulation FD. Controlling for other factors affecting the spread, we find that adverse selection costs increase approximately 36% after Regulation FD. We interpret our finding as Regulation FD failing to achieve one of its desired objectives.     

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 regulation Fair Disclosure on investors' prior information quality — Evidence from an analysis of changes in trading volume and stock price reactions to earnings announcements

We document that Regulation Fair Disclosure has reduced differences in information quality between investors prior to quarterly earnings announcements consistent with the intent of the regulation. This reduction is driven by small firms and high technology firms, rather than the large firms targeted by the SEC, which suggests that selective disclosure among large firms may have been much more limited than what was presumed by proponents of FD. In addition, we document that FD has decreased the average information quality of investors in small and high technology firms in the period prior to an earnings announcement while having no lasting effect on other firms. Taken together these two results suggest that, for small and high technology firms, FD succeeded in eliminating selective disclosure but also lowered the average quality of information available about these firms.     

Sell‐Side School Ties

We study the impact of social networks on agents’ ability to gather superior information about firms. Exploiting novel data on the educational background of sell‐side analysts and senior corporate officers, we find that analysts outperform by up to 6.60% per year on their stock recommendations when they have an educational link to the company. Pre‐Reg FD, this school‐tie return premium is 9.36% per year, while post‐Reg FD it is nearly zero. In contrast, in an environment that did not change selective disclosure regulation (the U.K.), the school‐tie premium is large and significant over the entire sample period.     

Disclosure and liquidity management: Evidence from regulation fair disclosure

We examine the effect of the firm’s information environment on its liquidity policy by exploiting a natural experiment involving Regulation Fair Disclosure (Regulation FD). We find, on average, Regulation FD has a negative impact on firm cash holdings. We also directly evaluate changes in firm disclosure policy and find the negative Regulation FD-cash holdings relation is stronger for firms that increased public disclosure and holds largely for firms that faced lower proprietary costs of public disclosure. Furthermore, we find this negative relation is more pronounced for firms with limited access to the credit market. We capture the medium-term effect of Regulation FD two years before and two years after the implementation. Overall, our results suggest that the change in the amount of information disclosed in response to Regulation FD, an externality effect, affects information asymmetry between firms and outside investors and thus cash holdings.     

Regulation fair disclosure and the cost of equity capital

We examine the effect of Regulation Fair Disclosure (Reg FD) on the cost of equity capital. We find some evidence that (1) the cost of capital declines in the post-Reg FD period relative to the pre-Reg FD period, on average, for a broad cross-section of US firms, (2) the decrease in the cost of capital post Reg FD is mainly for medium and large firms but is insignificant for small firms, and (3) the decrease in the cost of capital post Reg FD is systematically related to firm characteristics indicative of selective disclosure before Reg FD. In contrast, we find little evidence of a decrease in the cost of capital for American Depositary Receipts and US-listed foreign firms, which are legally exempt from Reg FD. Overall, our findings do not support a conclusion in recent studies that the cost of capital has increased post Reg FD and, if anything, suggest the opposite.     

Information asymmetry,information dissemination and the effect of regulation FD on the cost of capital

This paper considers the impact of Regulation Fair Disclosure (FD) on firms’ information environments and costs of capital. For NYSE/Amex firms we find little evidence of a change in the cost of capital attributable to Regulation FD. For Nasdaq firms we find that Regulation FD increased firms’ costs of capital by 10–19 basis points per annum though the statistical significance of this change is modest for some of our models. We also show substantial cross-sectional variation in the cost of capital changes. We find that cost of capital changes were negatively related to both pre-regulation firm size and PIN. In addition to the findings regarding Regulation FD, this research contributes to a growing literature that documents links between firms’ information environments and their costs of capital.     

The Differential Impact of the Force of Law Australian Auditing Standards

This qualitative study explores whether the impact of the introduction of the legally enforceable Australian Auditing Standards (ASAs) differs between audit firms based on their size. It complements and extends the Australian Government's pre‐implementation April 2006 Regulation Impact Statement ( AUASB 2006 ) and Hecimovic et al.'s (2009) study exploring the perceptions of key stakeholders. The results of the current study, based on data from extensive interviews with auditors from small, medium and large audit firms, suggest that compliance with the legally enforceable ASAs does not appear to increase perceived audit quality or public confidence. The study also finds that the costs/benefits to small audit firms and their clients differ to those of medium and large firms, raising questions about the viability of smaller firms remaining in the audit market.     

Information leakage of ADRs Prior to company issued guidance

We examine whether the degree of selective disclosure (as measured by information leakage prior to managerial earnings guidance) of foreign firms with ADRs is different from that of U.S. firms. We find that there is no variation of leakage before earning guidance between ADRs and U.S. firms. This result is consistent with the prediction that, despite being exempt from Regulation FD, ADRs have sufficient incentives to avoid selective disclosure even without the regulatory enforcement. In addition, we attempt to determine whether the variation in selective disclosure among the foreign firms with ADRs is conditioned on the respective home country transparency and governance standards. We find that country-specific characteristics, such as corruption perception, economic freedom and the legal system origin, explain the variation in information leakage of ADRs.     

The effect of more rules‐based guidance on expense disclosure under International Financial Reporting Standards

International Financial Reporting Standards (IFRS) are often described as principles‐based; however, we show that IFRS and Australian pre‐IFRS expense‐related standards are more rules‐based than pre‐IFRS expense disclosure in New Zealand. Thus, we examine expense disclosure in New Zealand and Australia around IFRS adoption to provide evidence on the effect of more or less rules‐based standards on voluntary disclosure. First, we add to the rules versus principles‐based standards debate by finding higher voluntary expense disclosure under more rules‐based standards (e.g. IFRS). This contrasts with expectations, as we would expect fewer voluntary disclosures under more rules‐based standards as there would be fewer possible voluntary disclosures. Second, we document that New Zealand firms have significantly less voluntary expense disclosure than size‐ and industry‐matched Australian firms in both the pre‐ and post‐IFRS period. However, all measures of expense disclosure significantly improved post‐IFRS for New Zealand, whilst little change occurred for Australian firms. Thus, there is greater financial statement comparability across these countries post‐IFRS, but not full harmonization. Third, we show that the relationship between most firm characteristics and expense disclosure is weaker post‐IFRS. In addition, cross‐listed firms and loss‐making firms have a higher level of expense disclosure, as contrasted with firms in the investment and property industry which have a lower percentage of unspecified expenses but also report fewer voluntary expenses.     

Analyst Firm Coverage and Forecast Accuracy: The Effect of Regulation Fair Disclosure

In this study, we revisit the relationship between analyst firm coverage and forecast accuracy. In contrast to the proposed negative association in Clement (1999) owing to the portfolio complexity effect, we hypothesize an ‘economy‐of‐scale effect’ that is likely to dominate when analysts rely mostly on public information. In support of the latter effect, we find a positive association between firm coverage and forecast accuracy after the enactment of Regulation Fair Disclosure (Reg FD), which substantially reduces the flow of material private information to analysts. Such a result survives a battery of robustness analyses. We further show that, in the post‐Reg FD period, covering more firms increases an analyst's probability of being selected as a star analyst in the subsequent year. Overall, our findings highlight the importance of the information environment in shaping the economic link between an analyst's firm coverage and forecast accuracy.     

The Effectiveness of Regulation Fair Disclosure: Evidence from an Emerging Market

The effect of corporate disclosure in emerging markets is not clearly predictable because of the prevalent information leakage prior to disclosure. We empirically examine the effectiveness of Regulation Fair Disclosure (Reg FD) in reducing information asymmetry among equity traders in an emerging market. Specifically, we test whether fair disclosure activity is negatively related to the probability of informed trading (PIN). Multivariate tests on a sample of listed companies in Korea subject to Reg FD reveal the following: (1) more frequent disclosure under Reg FD is related to lower information asymmetry, and (2) this relation differs across the types of disclosure, with the effect of qualitative disclosures on the PIN being weaker than that of quantitative disclosures. Evidence also indicates that the negative association between fair disclosure activities and information asymmetry is more (less) pronounced for firms with poorer (better) information environments where selective information leakage is more (less) likely. The results are robust to sensitivity tests. Our findings have implications for disclosure regulations in emerging markets, given that the existing literature casts doubt on the effectiveness of corporate disclosure in such markets.     

Voluntary disclosure practices by foreign firms cross-listed in the United States

This is one of the first large-scale studies to examine the voluntary disclosure practices of foreign firms cross-listed in the United States. We proxy for voluntary disclosure using three attributes of firms’ management earnings guidance: (1) the likelihood of issuance; (2) the frequency of earnings guidance; and (3) a guidance quality measure. After first establishing that market participants view these firms’ disclosures as credible and economically important (i.e., the disclosures are negatively related to analyst forecast errors and the implied cost of equity capital), we compare cross-listed firms’ disclosure practices with comparable US firms and explore variations in disclosure practices among cross-listed firms. We find that cross-listed firms issue less frequent and lower quality management earnings guidance than comparable US firms. We further show that the gap between US and cross-listed firms widened after passage of Regulation FD, a regulation which induced greater public disclosure of firm-specific information. Focusing on the sample of cross-listing firms, we show that firms from common-law countries disclose more than firms from code-law countries. Finally, our results indicate that cross-listed firms that do not list on an organized US exchange provide more frequent and higher quality disclosure than those that do list on organized exchanges.     

The Association between Outside Directors, Institutional Investors and the Properties of Management Earnings Forecasts

We investigate the relation of the board of directors and institutional ownership with the properties of management earnings forecasts. We find that firms with more outside directors and greater institutional ownership are more likely to issue a forecast and are inclined to forecast more frequently. In addition, these forecasts tend to be more specific, accurate and less optimistically biased. These results are robust to changes specification, Granger causality tests, and simultaneous equation analyses. The results are similar in the pre– and post–Regulation Fair Disclosure (Reg FD) eras. Additional analysis suggests that concentrated institutional ownership is negatively associated with forecast properties. This association is less negative in the post–Reg FD environment, which is consistent with Reg FD reducing the ability of firms to privately communicate information to select audiences.     

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.     

An empirical evaluation of analysts’ herding behavior following Regulation Fair Disclosure

This study examines whether analysts’ forecasts exhibited increased herding behavior following the adoption of Regulation Fair Disclosure. A recent model by Arya et al. [Arya, A., Glover, J., Mittendorf, B., Narayanamoorthy, G., 2005. Unintended consequences of regulating disclosures: The case of Regulation Fair Disclosure. Journal of Accounting and Public Policy 24 (3), 243–252], using a discrete-time information cascade-based model, projects that one potential consequence of Regulation Fair Disclosure might be increased herding by financial analysts, although previous studies examining the economic consequences of Regulation FD have generally not found any averse consequence for investors. We examine financial analysts forecasting behavior before and after the adoption of Regulation FD in order to determine if such herding of forecasts occurred empirically. Our general finding is that increased herding behavior cannot be detected among either the firms most directly impacted by Regulation FD (those which used to hold closed press conferences), or those least affected (i.e., firms that used to either hold open or no press conferences). However, because analysts face diverse incentives for engaging in either herding or anti-herding behavior, our results are not interpretable as an empirical test of the Arya et al. (2005) theoretical model.