The Securities and Exchange Commission (SEC) adopted Regulation FD (Fair Disclosure) effective October 2000. “The regulation provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), it must make public disclosure of that information.” In their June 2005 paper entitled “Who is Afraid of Reg FD? The Behavior and Performance of Sell-Side Analysts Following the SEC’s Fair Disclosure Rules”, Anup Agrawal, Sahiba Chadha and Mark Chen assess the impact of Regulation FD on the accuracy and dispersion of sell-side analyst earnings forecasts. By examining earnings forecasts from March 1995 to June 2004, they determine that:
- The accuracy of both individual analyst and consensus earnings forecasts has decreased since implementation of Regulation FD. The decrease in consensus earnings forecast accuracy is especially pronounced for small companies.
- The dispersions of individual analyst earnings forecasts for specific companies have increased since implementation of Regulation FD.
- Both effects are larger for longer-range than for shorter-range forecasts.
- Both effects have grown over time since implementation of Regulation FD, suggesting an increasing level of compliance at a lower average level of disclosure, thereby forcing individual analysts to develop forecasts independently.
In summary, research results indicate that Regulation FD has leveled the playing field for all investors, and reduced the accuracy of sell-side analyst earnings forecasts.
