Regulation FD, Accounting Restatements and Transient Institutional Investors' Trading Behavior

Abstract

We examine the impact of Regulation Fair Disclosure (RFD) on transient institutional investors' abnormal trading behavior around accounting Restatements before and after RFD. We find that while before RFD, transient institutional investors exhibit abnormal selling of stocks in restating firms one quarter before the restatement is publicly announced; after RFD, there is no such abnormal selling. Eliminating SAB 101 based and SEC initiated restatements, we find that prior to RFD transient institutional investors' abnormal selling one quarter before the restatements are publicly announced prior to RFD becomes statistically stronger; while after RFD there is no such abnormal selling. We also find that the transient institutional investors' abnormal selling one quarter before restatements are publicly announced, prior to RFD is driven by (a) non-revenue related accounting restatements, (b) small and medium sized firms, and (c) firms with low analyst following. Collectively, the evidence suggests that RFD has been effective in curtailing selective disclosure to investors and thereby leveling the playing field across investors. Also, the evidence is consistent with the notion that private information with respect to restatement is a likely factor as against the institutional investors' superior ability in predicting accounting problems.