The effect of the SEC's Regulation Fair Disclosure on analyst forecast attributes and related market reactions

On October 23, 2000, the U.S. Securities and Exchange Commission (SEC) issued Regulation Fair Disclosure (hereafter Reg. FD), which prohibits selective disclosure of material nonpublic information to certain financial analysts, institutional investors and others prior to making it available to the general public. This study examines the effect of Reg. FD on analyst forecast performance and market reactions for both closed-call firms and open-call firms as compared to the non-conference-call firms in the pre-Reg. FD and the post-Reg. FD periods. It investigates whether Reg. FD influenced analyst earnings forecast errors and forecast dispersion for the previous closed-call firms in the post-Reg. FD period as compared to the previous open-call firms since some analysts lost their exclusive access to the management after the implementation of Reg. FD. More importantly, it investigates whether the price changes around earnings announcements for both previous closed-call firms and previous open-call firms were the same as intended by the SEC. Since previous studies found conference calls improve analyst forecast performance and increase the information gap between the analysts privy to the call and the remainder of investors before Reg. FD took effect (Bowen, Davis and Matsumoto 2002), this study further analyzes analyst forecast attributes and market reactions between the open-call firms and the closed-call firms after the release of Reg. FD.; The study provides evidence that analysts made more accurate forecasts for closed-call firms as compared to the non-conference-call firms in both pre- and post-Reg. FD periods. Moreover, analysts made more accurate forecast for open-call firms as compared to closed-call firms in the pre-Reg. FD period, whereas there is no significant difference between analyst forecast performance for the previous open-call and the previous closed-call firms in the post-Reg. FD period. Meanwhile, market reactions around earnings announcement dates in three different windows, (-1, +1), (-2, +4) and (-5, +10), are significantly different between the open-call firms and the closed-call firms prior to the release of Reg. FD, whereas these differences disappear after the implementation of Reg. FD. In addition, the first and second Reg. FD events are the most significant events during those six events leading to the passage of Reg. FD.; Overall, these findings imply that, to some extent, Reg. FD did "level the playing field" for financial analysts and investors, consistent with Reg. FD's success in eliminating selective disclosure.