Information, selective disclosure, and analyst behavior.

This paper examines whether the prohibition of selective disclosures to equity research analysts mandated by Regulation FD alters the amount olin formation and the manner in which it is revealed to the market. We demonstrate that equity research analysts are more responsive to information contained in company-initiated disclosures after Reg FD, suggesting that regulation has affected the importance of various channels of communication. We also present evidence consistent with the notion that managers use earnings guidance as a substitute for selective disclosure following the passage of Reg FD.

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Ever since Dirks versus the Securities Exchange Commission (SEC) established a legal framework for conducting equity research, stock analysts have been the recipients of selective disclosures of private information from the companies they follow. (1) Historically, companies have been allowed to release material information to analysts without simultaneously making it available to public investors. For example, if management wanted to lower earnings expectations, it could make selective disclosures to analysts who would then lower their earnings forecasts. In this manner, companies were able to indirectly release important information without having to publicly disclose its exact nature. (2)

Under the leadership of Arthur Levitt, the SEC determined that selective disclosures were unfair to public investors. The adoption of Regulation Fair Disclosure (Reg FD) in October 2000 was designed to "level the playing field" for all investors by prohibiting selective disclosures to analysts and institutional investors, thereby requiring firms to make public, within 24 hours, all disclosures of material information.

The passage of Reg FD has spawned a debate concerning the quantity and quality of information that will be available to investors in this new environment. Our paper contributes to this literature by addressing the following questions: 1) do firms rely more on public disclosure after Reg FD? 2) do equity research analysts, the former beneficiaries of selective disclosure, rely more on public announcements when revising earnings forecasts? and 3) does the manner in which firms choose to disclose information change? (3)

Although Reg FD is silent on how firms should respond to the elimination of selective disclosure, they have various mechanisms at their disposal to disclose private information such as earnings announcements, company issued earnings guidance, press releases, letters to share holders, and mandatory filings. (4) We examine whether firms stop providing this information or choose an alternative disclosure channel as a substitute for selective disclosure. We also consider whether the amount of information per disclosure channel and the amount on a per disclosure event basis change in the post-FD period.

The purpose of this paper is to examine how the elimination of selective disclosure alters the overall information transmission process. This is an important distinction relative to other studies, which tend to focus on only one particular aspect of the disclosure process such as earnings guidance. Since the information used to price securities is obtained from many sources, we believe that it is more appropriate to draw conclusions about the effect of Reg FD by considering how firms adjust their disclosure policies in the aggregate. The larger question then is whether and how managers change their relative usage of different disclosure channels in response to regulation.