Savvy Financial Analysts Adapt to Regulation ‘Fair Disclosure’
Skip to content
Policy May 1, 2007

Savvy Financial Analysts Adapt to Regulation ‘Fair Disclosure’

The 2000 law has pushed analysts to seek independent information - to the benefit of the investors they advise

Based on the research of

Partha Mohanram

Shyam Sunder

The prediction was dire: if financial analysts ceased to get preferential access to information from the companies they followed, the quality of their forecasts would suffer and cause volatility in the markets.

That was the claim made by financial analysts in October 2000 when the Securities and Exchange Commission passed Regulation Fair Disclosure (Reg FD), restricting firms from disclosing nonpublic information to preferred analysts and institutional shareholders. Specifically, Reg FD required that firms conduct investor communications in such a way that all investors received material information at the same time.

After analysts lost their access to inside company contacts, however, their forecast accuracy did not worsen. In fact, as demonstrated in a recent study by Shyam Sunder (Kellogg School of Management) and Partha Mohanram (Columbia University), Reg FD encouraged analysts to obtain independent information, an important benefit for the investors who rely on their advice.

Sunder and Mohanram set out to discover how analysts changed their operations to maintain their forecast accuracy after Reg FD was passed. Using data from the Institutional Brokers Estimate System and COMPUSTAT, the researchers examined the following: whether analysts changed how they weighted the different kinds of information they obtained; whether they changed the number of firms they covered; and whether some individual analysts produced less accurate forecasts, even though average performance had stayed the same. Their sample covered October 1999 through December 2001 and included firms with at least four forecasts available both prior to and after the passage of Reg FD.

Using a model developed by Barron, Kim, Lim and Stevens (1998), Sunder and Mohanram found that Reg FD leveled the playing field among analysts. Overall, large brokerage houses lost their edge in producing superior financial forecasts. However, analysts from big brokerage firms that were classified as “all star” analysts by Institutional Investor magazine in 1999 continued to produce superior forecasts after Reg FD was enacted. When access to privileged information was restricted, the better analysts developed new information sources which helped them maintain their superior forecasting ability.

Sunder and Mohanram noted a decline in the number of firms covered by individual analysts. In the big brokerage houses, there was an overall drop of one firm per analyst. For “all star” analysts, however, there was essentially no decrease in the number of firms covered.

Further, the researchers determined that analysts placed greater emphasis on obtaining information independently, in part by reducing coverage of well-followed firms and increasing coverage of firms that had received less attention. The quality of “common information” (information disclosed by companies to all analysts) remained unchanged after the passage of Reg FD. The quality of “idiosyncratic information” (information that analysts developed independently through their own methods) actually improved (Figure 1).

Figure 1: Mean information precision around Reg FDimage


Sunder gave an example of how and why Reg FD has resulted in increased development of idiosyncratic information:

“Let’s say there is a retail company-call it Big Mart. Projected quarterly sales and market share would be valuable information for investors and analysts. Before Reg FD, some analysts may have had a relationship with someone inside the company from whom they could obtain this information.  Now, if the company gives the information to anyone, they must give it to everyone. The company may not want to give the information to everyone,  because they may not want their competitors to have the information.

“One method the analyst may use to obtain replacement information may be to physically go to some of Big Mart’s stores, count the number of customers they see, and estimate how much they are buying. They would combine this with macroeconomic data, such as national and regional buying trends. Looking at all these factors, they would come up with their own estimates as to what the quarterly sales and market share will be. This can result in very in-depth analysis. Analysts will take different approaches-some will rely strictly on available quantitative data; others will take a more “boots on the ground” approach and observe first-hand what is actually happening.”

Sunder and Mohanram speculate that some analysts may prefer to invest their intellectual efforts on firms where they can distinguish themselves “instead of herding around extensively followed firms.” Also, Reg FD may have raised the cost of following the well-followed firms, making it worthwhile to invest effort in following a greater variety of companies.

Leveling the field for analysts has implications for individual investors, Sunder pointed out. “Quid pro quo was part of the old system,” he said. “If analysts get their information from the companies, they can become a marketing tool for the company, talking up their stocks. Reg FD has resulted in more diverse and better analyzed views.”

Further reading:

Barron, Orie E., Oliver Kim, Steve C. Lim and Douglas E. Stevens (1998). “Using analysts’ forecasts to measure properties of analysts’ information environment.” Accounting Review, 73(4): 421-433.

Featured Faculty

Member of the Department of Accounting Information and Management faculty between 2002 and 2010

About the Writer
Beverly A. Caley, JD, a free lance science writer based in Corvallis, Oregon.
About the Research

Mohanram, Partha S. and Shyam V. Sunder (2006). “How has Regulation FD affected the operations of financial analysts?” Contemporary Accounting Research, 23(2):491-525.

Most Popular This Week
  1. How Much Do Boycotts Affect a Company’s Bottom Line?
    There’s often an opposing camp pushing for a “buycott” to support the company. New research shows which group has more sway.
    grocery store aisle where two groups of people protest. One group is boycotting, while the other is buycotting
  2. 5 Takeaways on the State of ESG Investing
    ESG investing is hot. But what does it actually deliver for society and for shareholders?
    watering can pouring over windmills
  3. Could Bringing Your "Whole Self" to Work Curb Unethical Behavior?
    Organizations would be wise to help employees avoid compartmentalizing their personal and professional identities.
    A star employee brings her whole self to work.
  4. When Do Open Borders Make Economic Sense?
    A new study provides a window into the logic behind various immigration policies.
    How immigration affects the economy depends on taxation and worker skills.
  5. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  6. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  7. What Happens to Worker Productivity after a Minimum Wage Increase?
    A pay raise boosts productivity for some—but the impact on the bottom line is more complicated.
    employees unload pallets from a truck using hand carts
  8. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  9. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  10. Why Well-Meaning NGOs Sometimes Do More Harm than Good
    Studies of aid groups in Ghana and Uganda show why it’s so important to coordinate with local governments and institutions.
    To succeed, foreign aid and health programs need buy-in and coordination with local partners.
  11. 3 Tips for Reinventing Your Career After a Layoff
    It’s crucial to reassess what you want to be doing instead of jumping at the first opportunity.
    woman standing confidently
  12. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  13. Podcast: Does Your Life Reflect What You Value?
    On this episode of The Insightful Leader, a former CEO explains how to organize your life around what really matters—instead of trying to do it all.
  14. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  15. In a World of Widespread Video Sharing, What’s Real and What’s Not?
    A discussion with a video-authentication expert on what it takes to unearth “deepfakes.”
    A detective pulls back his computer screen to reveal code behind the video image.
  16. College Campuses Are Becoming More Diverse. But How Much Do Students from Different Backgrounds Actually Interact?
    Increasing diversity has been a key goal, “but far less attention is paid to what happens after we get people in the door.”
    College quad with students walking away from the center
More in Policy