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Regulation Fair Disclosure Case Study

744 Words3 Pages

Introduction Prior to the enforcement of Regulation Fair Disclosure (FD), many public companies are revealing important nonpublic information to the institutional investors or financial analysts, before disclose such information to the public. When this happened, those people who gain insight information can take advantage of others by buying or selling shares of the company beforehand. As a result, on October 23, 2000, the Securities and Exchange Commission (SEC) introduced the enforcement of Regulation Fair Disclosure (FD) to prevent the selective disclosure of information by publicly traded companies, which requires public companies to disclose material information as releases to financial analysts or others to the public at the same time. Consequently, insider trading becomes an alternative way by which a firm can passes on private information to financial analysts about the company’s future earnings. Because analysts are people who common investors usually rely on for earnings forecasts. As Schipper (1991) describes how analysts, as informed …show more content…

Based on prior study, Healy and Palepu (2001) and Kothari (2001) indicated that the change in firm value is a reflection of the change in expected earnings, analysts’ earnings forecast revisions are expected to be consistent. For further analysis, we will examine the impact of insider trades on analysts’ forecast revision in response before the implementation of regulation fair disclosure and after the enforcement. After the enforcement, financial analysts have less private information provided to them by management or top executives, which is likely to cause changes in their earnings

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