How Has Regulation Fair Disclosure Affected the Functioning of Financial Analysts?

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Abstract
We analyze the impact of Regulation Fair Disclosure (Reg. FD) on the functioning of financial analysts. Heflin, Subramanyam and Zhang (2003) suggest that Reg. FD has not impacted forecast accuracy and dispersion. Using a longer post-FD period we confirm Heflin et al.'s result with respect to the forecast error and dispersion. The absence of a measurable adverse effect on forecast accuracy and dispersion is puzzling given that in the pre-FD period non-public information channels were very important sources of information for financial analysts. Using the model in Barron, Kim, Lim and Stevens (1998), we find that analysts are compensating for the deterioration in the precision of common information in the post-FD period by investing more effort in idiosyncratic information discovery. In order to increase the level of effort on information discovery individual analysts appear to be reducing coverage for well followed firms while increasing coverage of firms that were less followed prior to Reg. FD. Analysts who had preferential links with firms that they covered, such as analysts from large brokerage houses, tended to have greater forecast accuracy pre-FD. However, these analysts are unable to sustain their forecasting superiority post-FD suggesting a leveling of the information playing field among analysts. Overall our results reflect a trend towards greater independence from management and reliance on idiosyncratic information discovery on part of the financial analysts.