Regulation Fair Disclosure and the Private Information of Analysts

This paper reports evidence that Regulation Fair Disclosure has had its desired effect of reducing selective disclosure of information about future earnings to individual analysts without reducing the total amount of information disclosed. In particular, it finds that multi-forecast days, which typically follow public announcements or events, now account for over 70 percent of the new information about earnings, up from 35 percent before Reg FD. This result is obtained by applying a new methodology from Zitzewitz (2001a) for measuring the information content of individual forecasts. These results are strongest for the fourth quarter of 2000, when the SEC Chairman who introduced Reg FD was still in office; since the change in administration, some of the initial effects of Reg FD appear to have been reversed. Regulation Fair Disclosure and the Private Information of Analysts On August 10, 2000, the Securities and Exchange Commission (SEC) approved Regulation Fair Disclosure (Reg FD), which became effective on October 23rd of the same year. This regulation prohibits the selective disclosure of material information to financial professionals including analysts; companies with material information to disclose must now do so in a press release or conference call that is simultaneously open to all investors. Reg FD has been controversial. Proponents have argued that the selective disclosure that Reg FD prohibits has at least three negative effects. First, selective disclosure creates incentives for analysts to optimistically bias their opinions in order to maintain access to information. Second, selective disclosure creates the opportunity for analysts’ favored clients to earn trading profits at the expense of uninformed investors and thus might be considered “unfair.” Third, by increasing the asymmetry of information, selective disclosure can reduce liquidity and increase firms’ cost of capital. In response, opponents of Reg FD have argued that informal conversations between analysts and management are essential to the transmission of information. Opponents argue that while Reg FD may make the dissemination of information more simultaneous and uniform, less information will be disseminated and/or information will be disseminated less frequently. This could potentially increase stock price volatility, particularly following earnings announcements. As one might expect, proponents are disproportionately groups of small investors and capital-raising corporations. The former SEC chairman who introduced Reg FD, Arthur Levitt, noted that “two thirds of our letters [in favor of Reg FD] came from Fools,” subscribers to the Motley Fool, a popular website for individual investors,