Market Abuse Regulation and the Quality of Analyst Reports in Korea: Evidence from Analyst Characteristics

Abstract

This study examines the impact of market abuse regulation on the quality of analyst reports in Korea. To compensate for the limitations of the old Capital Market Act, the Market Abuse Regulation provision was incorporated into the revised Capital Market Act and enforced in July 2015. The key feature of the new regulation is that it expands the scope of insider information; punishes not only the direct receiver, but also the n-th receiver of material information that is not released to the public; enables an easier enforcement of punishment becomes easier as the authority can impose monetary penalties without upper limitation. With the samples of analysts issuing reports both in pre- and post-regulation periods, I find that the market abuse regulation decreases the accuracy of analyst and forecast optimism, while it increases forecast dispersion at the analyst level. The effect of the regulation varies with the analysts’ characteristics, such as previous performance, changes in performance, and coverage of firms. Overall, analysts no longer benefit from the selective disclosure of information and have less incentive to maintain their optimism. The evidence indirectly indicates there is no increase in the public information that may substitute the private channels of insider information. Several additional analyses are conducted such as the impact of the regulation on Chaebol-affiliated analysts and the changes in the precision of public and private information and its effect on earnings forecast accuracy after the regulation.