Blog - Investing Notes

November 16, 2005 – Regulation FD: Have Some Big Shots Lost Their Privileges?

The Securities and Exchange Commission (SEC) adopted Regulation FD (Fair Disclosure) effective October 2000, seeking to eliminate selective disclosure (for example, to favored securities analysts) by requiring companies to disseminate widely and publicly all material information. In their recent paper entitled "An Examination of the Differential Impact of Regulation FD on Analysts' Forecast Accuracy", Scott Findlay and Prem Mathew investigate the effects of Regulation FD on the relative accuracy of earnings forecasts. Have previously privileged analysts lost a private information edge? Using a database covering quarterly and annual earnings forecasts for 3,000 individual analysts, they determine that:

• On average, analysts produce less accurate earnings forecasts since implementation of Regulation FD.
• Analysts with relatively more (less) accurate earnings forecasts prior to Regulation FD perform relatively worse (better) after the regulation.
• Since Regulation FD, research firm size and company experience are less important contributors to analyst forecast accuracy. The big players have lost some advantage over small research firms.

In summary, Regulation FD has helped level the playing field for analysts, and likely also for investors/traders.

For related research, see our blog entries of:

7/26/05 finding that the underreactions of stock analysts in revising earnings forecasts increase with the earnings forecast dispersion, contributing along with the Sarbanes-Oxley Act and Regulation FD to a persistent skew in earnings projections;

7/17/05 on the implications of Regulation FD's effect on earnings forecast dispersion for the Zacks system; and,

7/12/05 regarding a growing Regulation FD-driven decline in earnings forecast accuracy, most pronounced for small companies.