Regulation Fair Disclosure and analysts’ reliance on earnings announcements

Abstract

Regulation Fair Disclosure prohibits corporations from selectively disclosing material information to groups of favored analysts and institutional investors. If information previously provided is excluded by the new regulation from analysts’ information set, it is plausible that the relative importance of the other information, such as earnings announcements, which remains could increase (Arya et al., 2005). The purpose of this study is to investigate whether analysts become more reliant on firm earnings announcements in revising their forecasts after implementation of the regulation. Our empirical results show that, after the regulation, more analysts issue forecasts immediately after earnings announcements. In addition, analysts’ earnings forecasts tend to converge more after observing earnings announcements in the post-regulation period. These results, in conjunction with the finding of higher overall level of forecast errors and dispersion, indicate that earnings announcements become more important information sources in the post regulation period. These findings suggest that analysts are more reliant on earnings announcements and there is an increase in analyst herding as a result of Regulation Fair Disclosure.