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The Role of Security Analysts and its Implications for Regulation FD
Leonard C. SofferUniversity of Illinois at Chicago601 S. Morgan (MC 006)Chicago, IL 60607(312) 996-2284soffer@uic.eduHuai ZhangUniversity of Illinois at Chicago601 S. Morgan (MC 006)Chicago, IL 60607(312) 355-1331huaiz@uic.eduDecember 2001We are grateful to workshop participants at the University of Illinois at Chicago for theircomments on the paper. We thank the University of Illiniois at Chicago for financialsupport of this project.
 
The Role of Security Analysts and its Implications for Regulation FDAbstract
We examine analysts’ earnings forecasts made after earnings preannouncements andinvestigate whether analysts’ forecasts are incrementally informative for predicting actualearnings. We find that they are not. We also find that investors rationally ignore theseforecasts and instead focus on preannounced amounts in setting their earningsexpectations.Our findings have implications for Regulation Fair Disclosure (FD), which mandates thatcompanies provide financial analysts and other investors equal access to materialinformation. Our results refute claims by the analyst community that investors are worseoff when they receive unfiltered information directly from companies, as facilitated byRegulation FD.
 
The Role of Security Analysts and its Implications for Regulation FD1. Introduction
In August 2000, the Securities and Exchange Commission (SEC) adopted Regulation FairDisclosure (FD). The purpose of the rule was to deal with concerns that security analystswere acting primarily as information intermediaries rather than as analysts. By requiringdisclosures of important information made to analysts to be made to the publicsimultaneously, the SEC hoped both to level the investing playing field and to focuscompetition among analysts on analysis rather than access to company-providedinformation.Some prominent analysts and analyst organizations argued that having superior access tocorporate information was appropriate because investors need analysts to interpretinformation provided by companies. Regulation FD encourages more directcommunication with investors, bypassing the important analysis step before informationis released generally. The Securities Industry Association (SIA) in May 2001 (after theenactment of Regulation FD) said:Analysis is now largely absent from the information disseminated by issuers, andthis information increasingly is transmitted first through the financial media,which is performing less analysis of its own. Only subsequently are securitiesanalysts afforded the opportunity to provide analysis, add additional content,context, and their judgments to the information provided in issuer announcements.The SIA continued on to say:The transformation to a paradigm of immediate and broad dissemination of datahas severed the traditional relationship between information and accompanyinganalysis, inundating the public with raw data – with little or no differentiation as
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