Investor Relations and Regulation FD

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stop disclosing altogether. 3 Critics argued that Reg FD would have in a chilling effect on communications as firms would prefer silence over publicly releasing information that could be exploited by competitors or misinterpreted by investors. The evidence tends to support the contrary, with several studies demonstrating that disclosure has increased in the post-Reg FD era. For example, Heflin et al. (2003) finds that public earnings disclosures more than doubled from pre- to post-Reg FD. Bushee et al. (2004) find that Reg FD had a dampening effect on manager’s decisions to host conference calls, however, the magnitude of the effect was not large. We expect that IR firms were likely to have been engaged in private guidance pre-Reg FD but that they will transition to public guidance after implementation of the rule. The analyst community was vocal in its opposition to Reg FD. They argued that Reg FD would reduce the quantity and quality of disclosure, leading to a lower quality of analyst forecasts and a weakened information environment (SIA, 2001). IR professionals are also concerned about forecast quality and cite decreased standard deviation of analyst forecasts and increased analyst forecast accuracy as measures of IR performance (Mahoney and Lewis, 2004). Additionally, the SEC was concerned that analysts felt pressured to maintain an optimistic view of a company in order to have continued access to selectively disclosed information. In general, the evidence implies that Reg FD has reduced selective disclosures to analysts but with mixed evidence on accuracy and dispersion. Gintschel and Markov (2004) find the price impact of analyst reports is lower and that this decrease is related to proxies for the level of selective disclosure prior to Reg FD (e.g. brokerage size) . Mohanram and Sunder (2006) find that analysts are spending more effort in private information discovery post-Reg FD. They also find an increase in forecast dispersion and that analysts with preferential links (the proxy again is brokerage size) have greater accuracy in the prior period but that this advantage is negated post- 3 A third (illegal) option would be to continue privately disclosing and disregard Reg FD. 7
Reg FD. However, Heflin et al. (2003) report no evidence of a change in analyst forecast accuracy or dispersion post-Reg FD. Overall, we investigate whether firms with professional IR held an advantage in terms of the number of analysts, ability to meet expectations, analyst forecast accuracy, forecast dispersion, and recommendation level in the pre-Reg FD period and the extent to which Reg FD affected this relationship. The SEC believed that firms who gave institutional investors private disclosures were allowing institutional investors an unfair advantage that they used to trade at the expense of uninformed investors. If firms with professional IR were able to attract and retain institutional investors by using private disclosure, this advantage could be eroded once Reg FD severed the ability to selectively provide nonpublic information. Thus, we investigate the change in the institutional shareholder base for firms with professional IR after Reg FD. A reduction in information asymmetry is the fundamental objective of Reg FD – leveling the playing field means that all investors have access to the same information at the same time. Theoretically, an improved information environment is related to a reduction in information asymmetry between investors and an increase in liquidity. Previous literature has used bid-ask spread, trading volume, and lack of consensus among analysts as proxies for information asymmetry (Leuz and Verrecchia, 2000; Barron et al. 2009). Complementing the theoretical literature, IR professionals cite decreased bid-ask spread and increased trading volume as measures of IR performance (Mahoney and Lewis, 2004). The evidence largely supports the view that Reg FD did not increase information asymmetry. Mohanram and Sunder (2006) find no change in the precision of common information in analysts’ forecasts post-Reg FD while Eleswarapu et al. (2004) find that information asymmetry (as reflected in the adverse selection 8
Page 1 and 2: Investor Relations and Regulation F
Page 3 and 4: professionalized IR role within fir
Page 5 and 6: field, IR firms do not lose any adv
Page 7: most members believed Reg FD would
Page 11 and 12: current practices, educational prog
Page 13 and 14: FD period and maintain this match f
Page 15 and 16: changes. These economy-wide changes
Page 17 and 18: fiscal quarter. We follow Barron et
Page 19 and 20: manage communications with investor
Page 21 and 22: firms may be privately disclosing m
Page 23 and 24: These are consistent with the objec
Page 25 and 26: y institutional investors. In the p
Page 27 and 28: equally sized groups (Low Change an
Page 29 and 30: REFERENCES Ali, A., Kallapur, S. 20
Page 31 and 32: Panel A: Number of MEF .2 .4 .6 .8
Page 33 and 34: TABLE 2 Descriptive Statistics and
Page 35 and 36: TABLE 4 Changes in Public Disclosur
Page 37 and 38: TABLE 5 (cont.) Changes in Analysts

Investor Relations and Regulation FD

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