How Has Regulation Fd Affected the Operations of Financial Analysts?

In this paper, we analyze how financial analysts generate information, make decisions about firm coverage and try to maintain their forecasting accuracy after the passage of Regulation Fair Disclosure (Reg. FD). Using the model developed by Barron, Kim, Lim and Stevens (1998), we find that analysts are investing more effort in idiosyncratic information discovery. In order to increase the level of effort on information discovery, individual analysts appear to be reducing coverage for well followed firms while increasing coverage of firms that were less followed prior to Reg. FD. Analysts who had preferential links with firms that they covered, such as analysts from large brokerage houses, tend to have greater forecast accuracy pre-FD. However, these analysts are unable to sustain their forecasting superiority post-FD suggesting a leveling of the information playing field among analysts. Overall our results reflect a trend towards greater reliance on idiosyncratic information discovery on part of the financial analysts